The Wholesale Price Index (WPI) inflation for the week ending 27 March 2004 was at 4.47 per cent ? within the range of 4.0-4.5 per cent that both the finance ministry and the RBI had been predicting through the winter. The accompanying chart tries to explain what happened with inflation over the past 12 months. The pressure on headline inflation came from a few commodities and if we analyse their separate contributions, the exercise is helpful in gauging prospective inflation in 2004-05.
The items that make up the basket of commodities in the WPI have been grouped into six categories. Category-I comprises primary food ? foodgrains, fruit and vegetables, eggs, meat and fish etc. It has contributed very little to overall inflation. Inflation in this category ranged from 0.8 per cent in end-March 2003 to a peak value of 2.3 per cent in end-December 2003. In end-March 2004 it was down to a mere 0.1 per cent. The fact is that agricultural productivity gains have been staying ahead of the increase in the demand for food for some time now. With forecasts of a reasonably good monsoon for 2004, food prices should continue to remain soft.
Category-II comprises refined petroleum products ? motor gasoline, diesel and the like. Prices of which are supposed to be decontrolled ? which they indeed are, but commonly subject to a lag dependent on a political reading of the situation. Through 2003, average inflation in refined petroleum products was in double-digit figures but for the week ending 27 March, 2004, it was a mere 0.2 per cent. Hence, its contribution can hardly be observed in the fourth column. The instinctive interpretation is that this is election-time compulsion. After all, in US dollar terms, average crude prices in March 2004 was 11 per cent. higher over previous March, while the rupee was stronger by almost 6 per cent. That left 5 per cent to be covered through domestic price adjustment. But February 2004 US dollar prices for crude were 6 per cent less than in February 2003, that is, 11 per cent less in rupee terms. So perhaps the conclusion about electoral compulsions may not be entirely accurate.
Category-III ? raw cotton, oilseeds, cotton textiles and edible oil provided a huge kick to inflation through 2003. The combined rate was 21 per cent in March 2003; it came down through 2003, but was still at 12 per cent in end-December 2003. By the end-March 2004, as a high base outweighed incremental increase, the combined inflation rate dropped to 8.7 per cent.
Category-V ? Iron and steel ? provided the other big kick to inflation in 2003. Inflation in this item rose from 9 per cent in end-March 2003 to a whopping 34 per cent in end-March 2004. This was despite one-third reduction in import duties and halving of union excise duties. Categories-III and V together account for less than 15 per cent of the total index, but their contribution to overall inflation in end-March 2004 was as much as 2.2 percentage points or about half of total inflation.
Category-IV comprises manufactured food products ? dairy and grain mill products, sugar, tea and coffee. One would have expected that the good rains of 2003 that have boosted farm produce would have led to softer prices. Strangely enough, the prices of these products have risen sharply since the autumn of 2003, and now run in the double digits. Sugar prices have gained despite the huge stocks lying with the mills on expectations of lower output this year. The reason why manufactured goods inflation has been showing up high is because of these items, besides of course cotton textiles and steel.
Finally, Category-VI, which is everything else ? from primary products to electricity to manufactured goods. Accounting for 56 per cent of the index, inflation was below 3 per cent in end-March 2004, down from 4.5 per cent in the previous March.
So how does fiscal 2004-05 look, inflation-wise? No particular pressure from food prices. Raw cotton and oilseeds prices at the end of March 2004 are already lower than they were in the previous two months. Edible oil and cotton textile prices have not changed in the past two months and seem to have stabilised. So Category-I & III should be quiescent. Grain mill product prices have levelled off, but raw milk and dairy product prices continue to rise and with the dry season ahead the trend may be expected to persist till September 2004. Crude oil prices are unlikely to go up much beyond what they already have in US dollar terms. The rupee is unlikely to depreciate appreciably against the greenback, and except for any backlog of price adjustments there ought not to be therefore too much pressure on headline inflation from prices of petroleum products.
Chinese domestic demand is yet strong and our domestic steel prices may at best level off, but are certainly susceptible to further increase. So while after mid-August 2004 steel price inflation should subside, it will still rise in double-digit figures through most of the current fiscal, contributing significantly both directly and indirectly (through cost push in steel using industries) to headline inflation. This, combined with a pick-up in other manufactured items where prices have been soft last year, is what makes for a heady cocktail keeping inflation high for a second year in a row.
In 2003-04, India has inflation that was higher than her peer group in Asia. The challenge will be to keep our headline inflation at least in line with the rest of developing Asia in 2004-05, so that we do not lose out on long-term competitiveness, given that industry and services are likely to clock close to 8 per cent growth. Inflationary pressures are showing up the world over the past few months, from the US to China, fed by a surge in commodity prices. Just a year back, China was being characterised as an exporter of deflation. Today, she is being marked as an exporter of inflation. Fashions do change very swiftly!