As the underlying inflationary pressure is easing off, wholesale price inflation could fall to 6% by December, Planning Commission deputy chairman Montek Singh Ahluwalia told FE in an interview. He added that it is this welcome sign reflected in the seasonally adjusted data that should influence policy-making at this juncture, rather than year-on-year figures impacted by the base level effect.
Inflation has been in double digits for five months in a row. It stood at 10.55% in June. Source said that the Planning Commission?s internal research shows that inflation could even fall to 5.5% by December, even after the impact of fuel price increase, that will show up in July data, is factored in.
?Because inflation rose last year quite sharply, the year-on-year rate would remain high and would slowly start coming down (from August-September). The point is that the prices this year have not been rising the way they were last year,?Ahluwalia said, drawing attention to the relatively flat nature of the Wholesale Price Index (WPI) graph so far this fiscal.
It was not difficult to ?kill? inflation provided ?if you don?t mind the collateral damage? to the economy, Ahluwalia said. Stating that the less than half way through the current fiscal, the economy?s overall prospects looked ?good,?he said the ?continuing reasonable growth rate? in capital goods output suggested investments were well on track.
Even as overall industrial output expanded at a 13-month low of 7.1% in June, capital goods production grew at 9.7%. During April-June, the growth in capital goods production was an impressive 34%.
Given the global economic conditions, an 8.5% growth on an average inflation of 6% would represent extremely good macro-economic management, he claimed, adding that going ahead, ?we ought to be aiming at somewhat higher growth and somewhat lower inflation.?
Ahluwalia said his prediction on inflation was based on certain assumptions that have strong grounding. Inflation?s underlying momentum is evidently relenting. There is a marked improvement in food availability thanks to good monsoon, adequate food stocks and the recent additional release of food grains. From 17-19% a few weeks ago, food inflation ? which forms about 50% of the primary articles that have a 22% weight on WPI ? came down to 9.5% for the week ended July 24. (It went up to 11.4% for the week-ended July 31 on predicted lines as food prices had declined in the same period last year).
The good monsoon and ample food stocks this fiscal are in sharp contrast to the grossly inadequate rains last year and continuous build-up of speculative pressure on prices. The easing of price pressures was evident in the entire primary products basket, and to a lesser extent, in the manufactured goods segment.
He added that he saw no huge pressure on prices globally this year– either on fuel or other raw materials– given the rather fragile nature of the global economic recovery. With huge excess capacities in products like steel, it was unlikely that their prices would go up.
?If you have failed to notice the base level effect, you would, in order to lower inflation, be wanting to (bring) prices down… ,? Ahluwalia warned. He, however, refused to comment specifically on what the RBI?s monetary policy trajectory should be. ?I?m sure that the governor is aware that the monetary policy should be forward-looking,? he said. When an inflationary upsurge occurs, the main policy imperative ought to be to effect a ?soft landing,? he said.
To curb inflation, RBI has raised policy rates four times by a total of 100-125 basis points since March and will review policy on September 16.
Ahluwalia said if inflation comes down to 6% by December as predicted, it can barely be attributed to the base effect. The decline would be because the underlying rate of inflation now is much lower than it was last year.
The present level of momentum, unless it is disturbed through some unexpected global developments, would ensure that the inflation would ease to 6% by December.