For the week ending 10 January 2004, the wholesale price index (WPI) inflation touched 6.2 per cent, setting off further speculation about its likely course in the months to come. Some months back, writing in this paper, one had commented on the curious anatomy of WPI inflation in 2003, deriving as it did its entire momentum from a handful of products, namely, raw cotton, cotton manufactures, oilseeds and edible oil, iron and steel, tea and, of course, petroleum products. Barring these, other primary and manufactured items ? food and non-food ? showed a remarkably different line of behaviour, with inflation rates ranging from small negative to small positive values. Most chemical and machinery items, for instance, ran inflation of less than 2 per cent.

In the closing months of 2003, there has been a resurgence in WPI inflation. In July, it did seem that with an excellent monsoon, agricultural product prices would soften and inflation, which had till that point been fuelled by cotton, oilseeds and coarse grain, would settle down ? which it indeed did. However, with sharp price increases in steel in mid-August and the continuing rise in cotton prices, notwithstanding a bumper crop, instead of settling down, WPI inflation began to further harden. The movement in commodity prices since the summer of 2003 ? be it in cotton, edible oil or steel ? has been partly due to rising international prices. This development is unlikely to be reversed soon, certainly not in 2004. However, given that global prices of these commodities seem to have peaked, with time the impact on the overall rate of inflation is likely to diminish.

Having said that, it is necessary to point out that changes in global prices are amplified in domestic markets in the presence of high import duties. It is useful to remember that import tariffs had been raised following the Asian currency crisis to protect domestic businesses from terribly low international prices. Time was when hot rolled coil prices had fallen to $190 per tonne. They are over $350 today. The reduction of peak tariffs and abolition of the 4 per cent SAD on 8 January 2004, to an extent, does recognise this change in circumstance, but not entirely. Should steel, which is an intermediate product, attract the peak tariff rate of 20 per cent and not a lower rate of 10 or 15 per cent? Further, the changes that have been made in import tariffs were restricted to industrial products. So, the punitive import duties on edible oil remain in place.

The strange thing about the 6 per cent plus rates of inflation reported for the first two weeks of January 2004 is the unexpected upward momentum in the overall index since October 2003. The bumper kharif harvest and the good standing rabi crop ought to have reversed the hardening in food items that we experienced last year. Oddly enough, while foodgrain prices have remained flat, the prices of grain mill products (flour, etc) have been rising at 11 per cent since early November. So also have the prices of dairy products and that of sugar, at 11 and 9 per cent, respectively. What with the colossal stocks of sugar in this country, this year?s large crop, the well-watered greener pastures and expected higher levels of milk output ? all this is a bit difficult to understand.

Price indices of oilseeds, edible oil and cotton also reversed course since early September despite the excellent domestic crop. The edible oil phenomenon was undoubtedly enabled by the indefensible duty protection. In the case of cotton, it was rising world prices and the increase in procurement rates announced by the Maharashtra government in October 2003. A possible explanation for increases in prices of dairy, grain mill products, edible oil and sugar since October 2003 is the increase in rural disposable incomes following on the excellent kharif crop and the higher income elasticity of demand for such items among lower income groups. Which severely undercuts the justification for very high import duties on items such as edible oil.

Then, there is the mystery of tea. For the week ending 10 January 2004, the rate of inflation for tea was a stunning 26 per cent ? a tea company?s dream certainly, but not the reality. Auction tea prices are currently much lower than at the beginning of the summer of 2003, and lower than that for 2002. Small as the weightage of tea might be, the 26 per cent rate generates a contribution of 0.25 percentage points to the overall WPI rate: One that can be deducted with considerable certitude. However, in periods of rising inflation, revised rates are higher than provisional estimates and the difference in overall WPI rate has been between 0.25 and 0.40 percentage points for October-November 2003. So, while the revised estimates for 10 January 2004 might eventually be 6.5 per cent, the tea adjustment would take us back to 6.2 per cent.

For the week ending 10 January 2004, raw cotton and cotton textiles contributed 1.0 percentage to the overall WPI index. For iron and steel, this number was 1.1 percentage points and that for oilseeds and edible oil it was 0.5 percentage points. The three, together, thus accounted for 2.6 percentage points of the 6.2 per cent rate of WPI inflation. The inflationary contribution from petroleum products was 0.8 percentage points.

In the coming months, crude oil prices are unlikely to rise further and changes in domestic inflation on that count will be restricted to the extent of lags in the revision of domestic retail prices. The good oilseed crop this year should cause the rate of price increase to level off. However, in the absence of reduction in the applicable import duties, further moderate price increases cannot be ruled out. International cotton prices are just coming off historic highs and whatever be the crop next year, domestic prices are bound to soften. The duty cuts have helped to cap prospective price increases in steel and after August 2004 its contribution would, at most, be small. Thus, overall the outlook for inflation in 2004 ranges from low to moderate.

The writer is economic advisor, ICRA