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Understanding India's Inflation Trends

Every week, our newspapers headline the inflation number, which is currently running at roughly -1% per annum. At the same time, the Prime Minister has expressed his concern about rising prices, especially in the context of the failing monsoons. The Governor of the Reserve Bank, too, has signalled that fighting inflation is a priority target for him. What's going on?

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5 views1 page

Understanding India's Inflation Trends

Every week, our newspapers headline the inflation number, which is currently running at roughly -1% per annum. At the same time, the Prime Minister has expressed his concern about rising prices, especially in the context of the failing monsoons. The Governor of the Reserve Bank, too, has signalled that fighting inflation is a priority target for him. What's going on?

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Importing Inflation

By Mohit Satyanand

10 August 10, 2009

Every week, our newspapers headline the inflation number, which is currently running at
roughly -1% per annum. At the same time, the Prime Minister has expressed his concern about
rising prices, especially in the context of the failing monsoons. The Governor of the Reserve
Bank, too, has signalled that fighting inflation is a priority target for him.

What's going on?

The dichotomy arises from the way in which figures are looked at. Across the world, commodity
prices are substantially lower than they were a year ago. But if we look at a shorter time frame,
from April 1, the beginning of our financial year, commodity prices are up roughly 20% on
aggregate. The Indian Wholesale Price Index (WPI) for all commodities is up from a figure of
229.7 on April 4 to 236.9 in the last week reported, at the end of July. This is a rise of 3.1% in
under 4 months, which would translate to inflation at the rate of over 9% per annum.

For food articles, the price index has gone from 248.6 to 261 during the same period. This rise, of
almost 5% over a 4 month period, means that we are looking at over 15% per annum. This has
the political establishment in a tizzy. On the one hand, there has been talk for a long time of
rationalising the food subsidy, and streamlining the issue of wheat and rice through the public
distribution system (PDS). At times like these, reforms are likely to be put on the back burner,
adding to the fiscal pressure of an already profligate state.

While India is self-sufficient in food grains, the nation still needs to import dals (lentils) and edible
oil. While oil and oil seed prices remain weak, lentil prices are extremely high, and demand from
India is likely to drive them higher. Indian sugar cane production is at a cyclical low this year, and
we will probably need to import sugar too.

Towards the end of last week, the fallout of a weak monsoon in India emerged as a major
concern for investors in Indian stocks, and equities lost almost 5% between Thursday and Friday.
Foreign investors were among the sellers, leading to weakness in the rupee. Ironically, this only
reinforces the pressure of imported inflation.

A rally in US stocks on Friday may act as a positive boost to our markets early this week, but the
reality of rising food prices does restrict the policy choices for a government trying to grapple
with stimulating our economy.

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