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The flip side
Inflation will be low for the second successive year. The latest official wholesale price index (for the week ended October 16) puts the (y-o-y) price increase at 2.84 per cent, up from 2.51 per cent in the previous week. For a single week, the increase was sharp. Inflation is likely to rise for a few more weeks, as the secondary impact of hiked diesel prices works itself out. Thereafter, the weekly increases will moderate, but not quickly. For the next few weeks, road transport charges will tend to be high; trucks have been held up in cyclone-hit Orissa and West Bengal; the backlog of freight traffic, built up during the truckers' strike, has to be cleared; and the rush to reach out goods to meet Diwali demand will have to be met before road transport gets back to normal. This aberration apart, the supply, overall, of critical wage goods is comfortable, not only of foodgrains (official stocks at August-end were close to 30 million tonnes, well in excess of the buffer requirement) but of edible oil, thanks tosoftening import prices, sugar and textiles. So it is only reasonable to expect, as forecast by the Reserve Bank, that inflation this fiscal will be lower than last year's 4.8 per cent.The flip side of this prognosis is that prices of industrial goods will not bounce despite evidence of improving capacity utilisation across the spectrum. For a while it appeared that with the revival of industrial production, prices would firm up. The first indication was the hike in automobile prices as also the rise in cement prices. But Mumbai, Chennai and Bangalore excepted, cement prices are less than lucrative for industry at most centres. Cement prices might strengthen as construction peaks after Diwali. However, apart from improvements in prices of specific products (including steel), prices of manufactures, notably of final demand goods, are unlikely to soar to fatten producers'margins. The rise in the cost of road transport has put a cap (so to say) on price escalations that manufacturers can enforce at wholesale delivery points. Corporates will have to sustain cost-cutting and improved working capital management, rather than rely on price mark-ups, to improve their bottomlines this year. This is the context of industry's plea for lower bank lending interest rates. The Reserve Bank must consider a fresh cut in the cash reserve ratio (CRR) to nudge the banks to soften their stance, and not wait (as stated by Bimal Jalan in an interview to FE of November 1) for the demand for funds to increase. At stake is the acceleration of industrial growth. Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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