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INFLATION PHOBIA

Inflation increased to 3.22 per cent for the week ending December 22, and is a slight increase on the rate of 3.15 per cent a week ago. While there is no denying upward pressure on prices, caveats are in order. This is the wholesale price index and has no immediate correlation with what is happening to consumer prices. Also, this is a point-to-point comparison and is thus a function of what the wholesale price index was exactly one year ago. Upward price pressure has been driven almost entirely by increases in the price of manufactured products. This is understandable. Thanks to excess capacity and competition, manufacturing prices have been historically in check, thus contributing to India’s low rate of inflation. With some signs of demand recovery, manufacturing prices should increase and there is indeed some correlation between sectors that witnessed recovery and those that exhibited higher price rises. This is therefore no reason for alarm. In contrast, decline in prices of primary articles shows that drought fears are exaggerated. Within primary articles, both food and non-food prices have declined. Of particular interest are prices of coarse cereals and oilseeds, both supposedly affected by drought. Prices of coarse cereals have declined and oilseeds show both increasing and declining trends, depending on which oilseed one considers.

To that extent, the Central Statistical Organization’s reduction of gross domestic product growth rate to 4.4 per cent in 2002-03 is probably exaggerated. Present trends suggest a continued upward pressure on prices. This is no reason for alarm and the Indian economy’s problems today concern growth rather than inflation. The only negative element is an almost-certain war in Iraq, with pressures on global oil prices. Scary scenarios suggest a short-term increase in crude oil prices to beyond $60 a barrel. At present, the fuel, power, light and lubricant category shows no increase in prices. A second Gulf War could change that. However, India has adequate foreign exchange reserves to cushion the impact and oil reserves have also been built up. While the duration of the second Gulf War is uncertain, there is no reason to presume that a balance of payments crisis like the one witnessed in 1990-91 is imminent, even if non-resident Indians were to withdraw their money. India’s worries will be more about global demand following such a war and its related uncertainties. The Reserve Bank of India and North Block should worry about growth rather than inflation. Scared of inflation, the RBI has often erred on the side of caution. It is time to reverse this.

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