Inflation persists

There is little hope that inflation numbers would look pretty anytime soon, with inflation now spreading to manufacturing. This is a very good reason to get tough on the fiscal deficit. Specifically, it is time to decontrol petrol prices, to reduce the subsidy burden on the fisc, to compress energy consumption and to remove the claim on loanable resources from oil companies scrounging for working capital. When savings are no longer diverted to fund a consumption subsidy, that gives the central bank some more room for monetary manoeuvre on the price front. Inflation measured by the wholesale price index continues to climb, and in April 2010, the 9.6% rise was led more by manufactured products rather than by primary articles. And, particularly by commodities that have strong global linkages such as iron and steel, which rose by a sharp 11.4% in April from a month ago, and by 14.6%, from a year ago.

The index for basic metals alloys and metal groups climbed 6.7% in April, from a month ago, and 8.4% from a year ago. With many economies, especially China, staging a recovery, these commodities would remain firm. Hardening crude threatens to worsen the domestic price situation. On a positive note, prices of primary commodities, and particularly food items such as wheat, have begun to moderate following government intervention, including open market sales. Potatoes and onions too have become more affordable in April. A reasonable monsoon would drive food prices down further.

The spread of inflation to manufacturing should not immediately lead to further monetary tightening. The tightening already undertaken is yet to be transmitted to the economy. And money supply growth has shrunk, to 14.7% in the year to April 23, from 21% in the preceding comparable period. The RBI needs to continue with its measured stance on tightening, the more so now, with the European turbulence. Besides, global commodity price rises have to be passed through to consumers, to moderate sector-specific demand rather than choked off through a generalised demand squeeze. So, the focus has to be on raising output and making the supply chain efficient.