Inflation heats up the economy

The wholesale price index rose 6.68% in the week ended 15 March 2008, surging from the previous week's rise of 5.92%. The rate is highest since 27 January 2007, when inflation was 6.69%.The week-on-week rise in inflation was seen across all major heads of the WPI with primary articles seeing the maximum rise of 233 basis points.Inflation in primary articles have gone up by 376 basis points within a span of just six weeks. Inflation in the fuel group has spiked by 100 basis points in just a week's time taking cues from the global surge in crude oil prices. Inflation in manufactured products has also surged to its 49 week high of 6.27% in the week ended 15th March 2008 and has moved up by 206 basis points in the first two weeks of March.The headline inflation crossed the tolerance level of five per cent set by the RBI for 2007-08 in the week ended 23 February 2008 itself. It is now within striking distance of 7%.

Based on the above data one can decipher the following :
1. There is a need to augment production and productivity in wheat,rice, edible oil and pulses as the rise in prices of these imported products has been a major driver of inflation in India.The country would be able to insulate itself from rise in global commodity prices only if it becomes self sufficient in the respective commodities.

2. Rise in commodities prices and inflation have become global worries. The price rise in commodities is putting pressure on inflation and thereby curbing growth.For growth to happen in India, we need lower interest rates but with the RBI having a hawkish monetary stance and with the government clear in its agenda on curbing inflation even at the cost of growth, it is highly unlikely that interest rates will come down in the near future.

3. Indian voters are known to be merciless when punishing governments unable to deliver on the price front and things are only going to worsen as the Budget and Sixth pay commission recommendations will result in increased disposable income in the hands of the consumer, which may result in higher inflationery pressures.

4. Lower interest rates are necessary to spur investment activities in the country and at current levels,there is a definite slow down in production and capacity addition plans of Corporate India.The IIP date has also not been encouraging.These supply side pressures are also contributing to rise in manufacturing inflation.Though imported inflation has been a major driver as reflected in the surge in prices of primary articles and fuel prices, domestic factors like high interest rates that have been ruling in the economy over the past one year have also resulted in significant supply side pressures along with demand slowdown.

In this scenario, the best bet for the government would be to reduce tariffs further, better supply-demand management, spur investment activities aimed at self sufficiency, cut back on wasteful spending and refrain from fuelling inflationary expectations.