Yes, inflation, led by food and fuel prices, is on the uptick. Yes, both the executive and monetary authority in India should be looking at the numbers with furrowed brows, although their concerns will be informed by different parameters. No, inflation figures are not an excuse for hardening interest rates. First, let?s deconstruct the inflation numbers. The WPI has increased from a low of 3.1% to 5%-plus in a short span of about 13 weeks ending February 23, 2008. This is not panic stations, but it isn?t life as usual either. Fuel prices are not a variable anyone in India can really control. Food prices have risen by 4.8%?half the level reached in early 2007. This is a moderate figure but the concern is in the detail: the spike in prices of some major items. Interestingly, wheat and pulses prices are, respectively, increasing marginally or falling. But rice, vegetables, eggs, meat, fish and oil seeds are all showing significant price activity. Domestic supply side solutions for rice and oil seeds are not plentiful in the short term. With comfortable foreign exchange reserves, imports are always an option. Bear in mind, though, that global prices?as our columnist today argues?are rising for many farm products. Thai rice, an important indicator for price watchers globally, is dearer, selling at $420 per metric tonne, nearly a 30% increase in two months. Oilseeds like soybean and copra have witnessed an almost 50% price rise recently.
So, what are the government and RBI to do? The government, unlike in early 2007, must not panic. That this could be an election year may, in the best case scenario, concentrate its mind. Since part of the inflationary pressure is globalised, import options have to be intelligently chosen. Banning forward trading or restrictions on agri business won?t dampen inflationary expectation. Some direct transfers to help poorer citizens, even if fiscally unwelcome, may become unavoidable. The central bank? Will it please note than an even tighter monetary policy will hold the price line by only impacting manufacturing, which, as noted in these columns, is already slowing down, affecting the growth momentum. Hard rate policies won?t address farm supply side situations. And policy-induced recession is not the inevitable answer to inflation.
