The temptation must be considerable to pass off the rising inflation, currently at 6.2 per cent, on to crude oil prices and the wonderful regime of mistimed lags in adjustment of domestic to international prices that has succeeded the Administered Price Mechanism (APM). Alternative candidates are the drought effect, the Iraq war effect or maybe the market in its omnipotence out-guessed the Met department. None of these touch the facts.

The fact that the shock of steep increase in oil prices in 1999-2000 did not create an inflationary spiral (peak inflation in manufactured goods was 4.5 per cent) reinforced the idea that the underlying inflationary trend in the Indian economy had fallen. In making policy, the powers that be have also tended to operate on this principle, whether it is in the toleration of high fiscal deficits or in the management of the interest regime and market expectations in that regard.

Which conclusion is not untrue. Between January 4, 1997 and March 29, 2003, the weekly wholesale price indices (WPI) reveal a trend rate of 4.7 per cent and a median value of 4.8 per cent. This was less than the range of 6 per cent to 8 per cent that the economy operated under in previous periods. The inflationary trend in manufactured goods is even lower at 2.9 per cent in the 1997-2003 period with a median value of 3 per cent. Which means several things. First, that price increases in manufactured goods have been significantly lower than that in primary goods and fuel, indicating productivity gains in manufacturing within a competitive framework. Second, headline inflation at close to 5 per cent is still high by even the current, more tolerant world standards. Third, the underlying trend for the rupee continues to be biased towards depreciation against major currencies, which in the context of balance of payments (BoP) surpluses is something of a problem.

If one examines the trend for headline inflation vis-a-vis the actual value of the indices, it becomes evident that inflation was above trend in the period September 2000 to the summer of 2001. This was followed by two periods of below trend price levels. The first began December 2001 and closed September 2002. The second started from January 2003 and ended this March. Part of the problem with inflation is the way we report it in this country, on a point-to-point basis ? this week compared to the same period last year. This overcomes the problem of seasonality, but at a high cost of losing plenty of information and often misrepresenting the actual situation. So, at 5.2 per cent point-to-point inflation, headline inflation is more or less back to the underlying trend value of 4.7 per cent per annum.

The champion contributors to inflation are not petroleum or food, but oilseeds & edible oil and raw cotton. Oilseed prices on March 29, 2003 were 26 per cent higher than a year ago and those of edible oil up by 27 per cent. Raw cotton prices were 35 per cent higher. Oilseeds and edible oil together added 1.14 percentage points (ppt) to headline inflation, while raw cotton contributed 0.35 ppt. That is, had prices of these items remained at last year?s level, overall inflation would not be 6.2 per cent, but 4.75 per cent.

Drought effect? Sorry, food prices have remained soft. Cereal and pulses were up 4 per cent, mostly because of bajra and jowar. Indices for fruit & vegetables show little change in prices, while indices for eggs, fish and meat are actually lower. Did the drought selectively hammer oilseeds and edible oil and raise the import duty on vegetable oil to 65 per cent? Improbable. Does Gujarat with its huge edible oil business and trade in electoral favours have something to do with this? Perhaps.

Manufacturing inflation at 4.8 per cent is continuing to pick up steam. This might ease after July when the previous year below-trend starts wearing off. However, overall the inflationary trend continues to be poised in the region of 5 per cent, not the best flavour for the upcoming elections.

The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)