The price of inflation

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higher food prices make him most conscious about inflation since he starts feeling the pinch on almost a daily basis. This is precisely where the current bout of inflation has acquired a damaging dimension.

The euphoria over 9% GDP growth has made many overlook the fact that most of North India didn’t get usual rainfall this winter. This might affect the rabi output. There are already reports of oilseeds production taking a hit and forcing customs duty cuts on a variety of edible oils for increasing imports. There will probably be more supply concerns for other crops also, if the overall rabi crop is much smaller this time around. On the oil front, global crude prices show no signs of relenting. Though with elections drawing closer, further pass-throughs are unlikely, the ‘imported’ pressure on domestic prices will continue to remain.

This brings us to manufacturing. Normally, policymakers do not tend to lose their sleep over some escalation in manufacturing prices. Good demand for manufacturing usually results harder prices. However, this time the situation is somewhat different. Domestic manufacturing is facing difficulties on account of high prices of imported raw materials, particularly metals. Sustained high input prices will, sooner or later, force producers to increase finished product prices. This is likely to unleash a chain effect of price rises throughout the economy as users of manufactured inputs also start raising their prices. Higher prices of auto parts leading to higher prices of passenger cars are a typical example. The worst-affected will be the average consumer. With high food prices hitting hard at home, the situation won’t much better outside with purchasables also becoming dearer.

In India, growth and prices usually tend to move together. Either they rise in tandem, or remain moderate. There is no doubt that high growth with low prices continues to remain the foremost objective of macroeconomic management. However, in a country where supply isn’t very fast in responding to changes in demand, flare-ups in prices are unavoidable. Thus high growth with moderate prices are hard to achieve on a sustained basis. Unless supply-side constraints are taken care of. How? The spread of organised retail, particularly food retail, can help by ensuring quick delivery of agri-produce to consumers. That might involve a greater participation of foreign retailers. Is that politically worse than high prices?