It looks like a rather benign summer…

With the skies darkened by rain-bearing clouds, widespread and abundant rainfall across the country, the southwest monsoon seems set to be a normal one. Or, as the Met department?s less than elegant prose put it: ?The probabilistic model suggests a very high probability for the southwest monsoon season rainfall over the country as a whole to be near normal and above.? Rainfall for the week ending July 6, was 34% above normal and cumulative rainfall since the beginning of June, just 2% short of the normal. The agriculture ministry has just revealed that last year (2004-05), foodgrain production was 204.6 million tonnes, 4.5% less than that of 2003-04.

Despite this decline, gross domestic product (GDP) arising from agriculture and allied activities rose by 1.1%. With the monsoon looking good, foodgrain production in 2005-06 should show robust increase and agricultural GDP could show a nice little bounce. But then, with agriculture there are so many variables involved that one can never be too sure. And one is well advised to be prepared for both, upside and downside surprises.

With inflation, however, statements and inferences can be drawn with greater certainty. For the week ending June 25, the wholesale price index (WPI) rate of inflation was 4.1%, about the same level as at the end of the previous week. This was despite the small increase in petrol and diesel prices, of Rs 2.5 and Rs 2 a litre, respectively, given effect to in that week.

Offsetting the increase in refined petroleum products was a strong base effect working in the reverse direction from coal, where prices had been raised in the week ending June 19. As a result, while WPI inflation in refined petroleum products jumped from 9.8% to 14%, that for the aggregate fuel index barely budged, rising from 9.1% to 9.8%.

The rate of inflation in manufactured goods came down further, to 3.5%. Just a month before, at the end of May, it was 5.4%. Here, again, it was the base effect, this time from steel, which had seen a sharp increase in price in the week ending June 5. With steel prices set to move in the reverse direction, not only will it be the base effect, but also actual price reduction that is poised to put downward pressure on the general price level for manufactured goods. Of course, base effects for select items start having large impacts when the prices of other commodities remain relatively stable. That happens to be the case at present, with the exception of non-ferrous metals and sugar, both around 11%. Most other manufactured goods have inflation in the low single-digit numbers.

Which is why, looking ahead to the rest of calendar year 2005, if not the balance of the fiscal year 2005-06, one can draw with some certainty the conviction that inflation in manufactured goods is likely to remain benign. In the coming months, the reported rate may fall to below 3% on occasion. While it would recover by October, even at the end of December, the WPI inflation in manufactured goods is still likely to be around 4%, if not slightly below.

This assumes that government will continue to drag its collective feet on passing on the increase in crude petroleum prices and leave the oil marketing, refining and producing companies to bear the financial distress. After all, it could perhaps be argued, what is the public sector for? Which, in turn, will help (the mostly private sector) manufacturing units with lower (than otherwise) energy bills. They consume a lot of captive power, besides directly using fuel in their processes and in transportation. The small increases in energy costs will, for the most part, be absorbed in productivity gains, given the pressure of competition on market share.

With world commodity prices already plateauing, or poised to do so, there will be added incentive on price restraints. With agriculture set for a good production year, food prices are likely to fall through the next three months.

With international crude prices in the range of $55-60 a barrel, the average cost of the Indian basket is already in excess of $55 a barrel, about 10% higher than when the last revision in petrol and diesel prices were made, in mid-June. Since world crude oil prices are unlikely to oblige us by coming down, there may be another instalment of pain-sharing and a small increase in prices is not unlikely by September-end. Assuming such an eventuality, by the end of September, the overall WPI inflation is unlikely to be much in excess of 4% and could well be lower. By the end of calendar 2005, assuming no further increase in the issue price of petrol and diesel, the overall rate of WPI inflation should remain below 5%.

In last fortnight?s column, we had discussed how the current round of interest rate increases appears to be coming to an end, earlier than what most people would have expected. Combine this external context with the fairly benign outlook for inflation in the coming months, and the relaxation of pressures that a good monsoon entails, and short-term conditions for macro-management do look quite favourable.

In all of this, the bad news is, of course, the recent bomb blasts in London. That jehadi terror is alive and kicking is not a lesson we need to be reminded of, having lived through so many atrocities over many years. However, for the developed world, however much it might have been anticipated-in-theory, there is still a consider- able element of the unexpected. That could serve to lower risk appetites in general, and amongst investors in particular, with potentially adverse knock-on effects on our growth outlook as well.

The writer is economic advisor to Icra