Inflation has several monetary implications. By and large, it is a powerful tool for fiscal management. The government has received flak for its fiscal mismanagement as the fiscal deficit is above 5 per cent of GDP. One school believes that inflation can be contained if expenditure is reined in. So the finance ministry officials have, in the past two budgets, drawn up harsh measures to curtail expenditure. Targeting subsidies, taxing export income and controlling money supply may help keep inflation under check. But what really needs to be seen is how ruling coalitions implement these hard decisions.In the past, India has experienced two digit inflation figures. Today, there is a growing fear that we may be moving towards the same once again. The rise in the oil pool deficit, a depreciating rupee are pointers of the bad times to come. But latest indicators point in the reverse direction.
Week before last, inflation fell 100 points to touch 6.45 per cent from previous week close of 7.54 per cent. The Reserve Bank of India and finance ministry officials have been rightly targeting interest rates lower which will improve the consumer demand thus pushing price levels higher.
But in the past, the old methodology was used to calculate inflation. But last year saw a revised series with 1993-94 as new base.
A look at the table will prove that with 143 new items included in the new basket, the wholesale price index (WPI) today is a better reflective tool of analysis. All along, it is the fuel component which is a major contributor to the price rise. For the year, April 2000-January 2001, when the all commodities per cent change was 7.0, it is the fuel group which recorded a per cent change of 28.6 compared to only 3 per cent change recorded each by primary articles and manufacturing products.
Despite a 100 points fall in the inflation rate, it is still higher than the corresponding period last year, of 5.4 per cent. With around 500 million tonnes of food buffer stocks and fall in the administered price levels, this fall has been mainly attributed to a drop in primary article prices. What is surprising is that it is the manufacturing sector that is getting the worst hit.
What does the government do in such a situation? It has no better option but to raise prices after the state assembly elections so that the revenue earnings are up to the target mark and industry gets the much needed boost.
Copyright © 2001 Indian Express Newspapers (Bombay) Ltd.
