Emerging market economies, including the four BRIC (Brazil, Russia, India, China) countries, after witnessing a comparatively higher growth than rest of the world, are now reeling under higher inflation, following a major demand-supply mismatch.
India?s WPI-based (wholesale price index) inflation for the week ended March 15 shot up to touch a shocking 6.68%, from 5.92% in the previous week, and much above the Reserve Bank of India?s 5% target. In China, the CPI (consumer price index) inflation rose from 2.7% a year ago to 7.1% in January and further to 8.7% in February. This is the highest since June 1996. Also, in Russia, inflation jumped to 12.7% from 7.6% in February 2007, while in Brazil inflation climbed to 4.6% from 3% a year ago.
Inflation in India has increased mainly due to a rise in commodity prices, while in China the inflation is mostly due to a food becoming costlier due to a harsh winter, which affected a majority if its provinces recently disrupting transportation and causing shortages in food items. Also, spurred by a feverish demand, China is indulging in heavy imports of commodities, which in turn pushing up prices of commodities, said Nagesh Kumar, director general, Research and Information System for Developing Countries.
Goldman Sachs, in its report, had said the four BRIC economies would be the major drivers of the world economy by 2050. The common factor among these countries is that the weightage of food inflation in the total basket is much higher in the developing (and emerging market) countries than in the developed nations.
Sonal Varma, economist, Lehman Brothers, said, ?Due to its higher weightage, the increase in food inflation is a greater risk for the developing countries. The policy response in the emerging market economies has been taking fiscal and trade policy measures to contain supply side inflation.? Lehman Brothers expects WPI inflation in India to average 6.5% (year-on-year) in FY 2009 versus 4.5% in FY08, rising above 7% during the course of 2008.
Rajiv Kumar, director and chief executive, ICRIER, said, ?Inflation is largely due to global trends such as rising prices of food, oil and commodities. It will weaken over a long period of time, but not in the next few months. So all developing countries will have to make necessary policy corrections to adjust to this phenomenon.?
TK Bhaumik, chief economist, Reliance Industries Ltd, warned against dismissing the inflationary trend as a short-term phenomenon and termed it as a structural problem. ?The rising demand in emerging market economies is reflective of the high growth. But the outlook for the global supply side is gloomy. Therefore, it will be difficult for the supply side to match up to the demand.?