Why have high fiscal deficits not triggered inflation? IMF-skeptics have not addressed the question. The assumption that inflation is as low as is shown by WPI defies the price-rise shown by consumer price index. In any case, changes in WPI during the 90s are telling. Between 1990 and 1998, the all commodities index (of WPI) rose by 85 per cent; but foodgrain-prices rose by 116 per cent; and energy prices by 100 percent. Prices rose faster than the all commodities (average) index in precisely the two areas where they are administered. Real incomes took a knock. This is perhaps why inflation slowed during the past 75 weeks.

In contrast, manufactured goods prices rose 76 per cent while non-food primary articles (inputs of industry) rose 82 per cent. Industry could not pass on the costs. Besides weak aggregate demand (a result of the real income squeeze), industry faced import competition. Industry was also caught unawares by the doubling of energy costs. Two points are clear. Inflation, as measured by WPI, has not been low as assumed. The rise in foodgrain and energy prices has been stiff and, in turn, has held down the rise in prices of manufactures. Rather than fiscal deficits, administered prices have fed inflation and industrial recession. So long as manufacturers prices do not rise, inflation will seem to be low.