Unkind New Year gift

The government's cup of woes overflowed on Thursday with food inflation numbers accelerating for the fifth straight week to the highest in more than a year. Driven by a sharp (59%) increase in the price of vegetables, the food price index rose 18.32% in the year to December 25, 2010, while the fuel price index climbed 11.63%.

Overall, the wholesale price index numbers for primary articles and fuel and power released by the Central Statistical Organisation revealed a deeply worrying situation. Regardless of the underlying factors - unseasonal rains that pushed up prices of vegetables such as onions and tomatoes in recent weeks - high inflation, coming on a high base (19.90%) last year, is bound to aggravate the distress of ordinary citizens.

As expected, the sharpest rise was in the case of onions where prices rose 82.5%. However, as the RBI has been warning for a while now, inflationary pressures are no longer confined to primary articles where the rains are a convenient scapegoat.

Thursday's numbers show mineral prices up 30.6% and petrol prices up 25%. Food articles have a weight of 14.34% in the broader wholesale price index for all commodities, so the spurt in vegetable prices will show up in the headline inflation number when December data is released a week from today. Clearly, all boasts (hopes?) that inflation would come down to 6% by March end are likely to be belied.

The RBI raised interest rates six times in 2010 but, as we had warned in these columns earlier, was clearly behind the curve. Monetary policy acts with a long and indeterminate lag. More important, the old homily about prevention being better than cure is truer of monetary policy than of any other.

Having delayed action in the early days when inflation reared its head, it now has no option but to raise them more sharply than would otherwise have been warranted. The tragedy is even if does so, it will be a while before the inflation dragon is slain in a scenario where the US Fed is hell-bent on further monetary easing and global food prices have hit a record high. The least the government can do is to unleash an Amul for fruit and vegetables.