The inflation scare

Updated: Jan 20 2007, 05:30am hrs
Starting a new year with worry creases on the forehead is not recommended. But the steady pick up in the wholesale price index (WPI), Indias main measure of inflation, leaves the country with few options. The figure hit a high of 6.1% in the first week of 2006, the highest over the last two years. This news, coming just about a fortnight from RBIs next quarterly review of monetary policy, does not augur well. Another hike in interest rates could create a pall of gloom in corporate India. Some particularly rate-sensitive quarters have already been dropping dark hints of a possible repeat of the mid-1990s nightmare which saw a panicky central bank make such sharp hikes that business found itself suffocated.

Some of the inflation spike may be on account of the base effect, with last years prices in the corresponding week being especially low. This raises the hope that inflation will fall in weeks to come. Still, price stability is now recognised as a must-have by a wide macroeconomic consensus, and the 6.1% figure does warrant some action. The signals are that the boom in investment and spending has pushed up demand so far in excess of supply that prices even of manufactured products have started defying gravity in unpredictable ways. This, in addition to the price spiral in food products. In many ways, the economy is in uncharted territory with investment trends showing scarce signs of reaching any sort of peak of a presumed cycle. With bigger sums being marked out for still bigger projects, many of them in the infrastructure sector, a quick reversal seems increasingly unlikely. Many of these investments are lumpy, and it is difficult to dampen the process. In response, while the RBI may well opt to tighten monetary policy in some way (hopefully in a restrained way), just how long it takes for the effect to reach the WPI is anybody's guess. In the interim, the government might consider a sharp cut in import tariffs on metals, cement, machinery and other investment goods, the rising prices of which have pushed manufactured goods inflation to 5.9%. Beyond that, agricultural imports may quickly need to be resorted torather than wait till the rabi crop reaches the market. Food inflation is almost in double digits. A few surgical strikes now might even save the trouble of taking more painful action later.