Oil shocks and inflationary episodes in India have historically come as package deals, with the cause-and-effect equation clear to everybody. The global oil flare-up of 1972-73 and the second one in 1979 were followed by rapidly rising domestic prices. The WPI annual average for fuel rose by over 60 points in the first episode, and by 71 points in the second. The rise in primary and manufactured articles was by 31 and 4 points, respectively, in the first bout. The inflation scenario has changed since then. As both the NDA and UPA governments have found to their surprise, a rise in retail prices of oil products does not translate into an orgy of rising prices. In fact, calculations show that the last retail fuel price revision in February?though hardly commensurate with the global increase in crude prices?pushed up WPI-based inflation by less than 25 basis points. International prices of crude are currently reigning at over $100 a barrel, but the experience of raising (government-controlled) retail prices in India suggests that a fuller pass-through would not result in all hell breaking loose. Inflation is thought to be raging at the moment (at about 7%), but this can be attributed primarily to a push from prices of agricultural commodities. This also means that fiscal measures are quite limited in the role they can play in taming the rise. Surgical efforts to ease supplies in specific cases would clearly be in order, but beyond that, inflation remains largely a monetary phenomenon that would respond to textbook monetary tools.
All inflation episodes since the 1970s have seen the manufacturing sector indices droop. As the government tries to talk manufacturers of steel and cement into containing prices, this is an important caveat. Even today, there are signs that core inflation in the economy (minus food and energy) is not terribly high. Consumers must bear the brunt of higher prices regardless of inflation?s origin, but pinpointing the causes of the problem helps find solutions. The government is in a muddle because it is trying to run an open economy without ridding itself of its old command-and-control instincts. If holding the rupee down to cushion exporters stoked inflation earlier, now it is the failure to give market forces a bigger role in the primary sector that?s to blame.