New Delhi, Aug. 6: Inflation spiralled to a three-and-a-half-year high at 7.51 per cent, raising fears that the economy is slipping into a condition of lower growth coupled with high prices.
The unexpected one percentage point surge in the rate of inflation (it was 6.52 per cent a week ago) on the back of rising food and iron and steel prices spooked the stock market.
Today’s figure is not the end of the inflation story. It is expected to rise next week when the impact of the petrol and diesel price increases on July 31 are factored into the wholesale price index. Inflation could then surge to 8 per cent — not seen since 1995-96.
The government’s chief economic adviser, Ashok Lahiri, however, expressed optimism that prices would come down in the next few weeks as the sobering effect of a delayed monsoon sets in.
“We expect inflation to come down by the middle of August. The arrival of monsoon will also help,” he said.
In the budget, finance minister P. Chidambaram worked on the basis of a 5.5 per cent inflation. If the average for the year goes beyond this, several factors could come into play, upsetting his sums.
First, there will be pressure on interest rates to go up. Already the government is locked in a battle with trade unions over the interest rate paid on provident fund, which is now 9.5 per cent. The unions want it raised, the government wishes to bring it down.
In a situation of high inflation, it would become difficult for the government to pursue its opposition. High inflation may also force revision of interest rates banks pay and charge. Already, one bank has raised the rate on home loans.
On top of all, in times of high inflation, the poor suffer the most. Food prices have started to go up.
At current rates of interest, saving has lost meaning. At 7.51 per cent, the inflation rate is above anything banks offer and is threatening to overtake the highest of 8 per cent return paid on small savings schemes of post offices.
Even senior citizens will be ahead of the inflation rate by less than 1.5 per cent if they put their money in the freshly-minted 9 per cent scheme meant for them.
“Interest rates, including on government bonds, are bound to rise; there is no way out,” said B.B. Bhattacharya, whose institute acts as a think tank for the government.
If, however, interest rates are put up, the government’s borrowing costs will soar and Chidambaram’s claim of cutting the deficit — the gap between expenditure and income — will fall flat.
Combined with this, Chidambaram is looking at a growth rate that will certainly be lower than last year’s 8 per cent or even lower than the 6.5-7 per cent they expect, given a monsoon that has been deficient in the crucial sowing month of July.
Bhattacharya, the director of the Institute of Economic Growth, painted the scenario thus: “Growth rates will be arrested... it will come down from last year’s 8 per cent plus to 5-6 per cent and inflation will keep inching up towards the double-digit mark.”
Besides a deficient or delayed monsoon, the danger stems from hardening global oil prices which hit an all-time high of $44.73 a barrel in New York. Most analysts believe that till the US resolves the West Asian turmoil, prices will continue to rise.
That danger has set alarm bells ringing in the finance ministry and Chidambaram’s advisers are likely to order use of the huge foreign exchange reserves to import goods whose prices are rising locally.
Politically, high inflation portends trouble — shooting onion prices brought BJP governments down in north India some years ago. The Congress-led alliance faces elections in four states shortly.
Deficient rainfall has already meant higher vegetable and fruit prices. Milk, rice and pulses have also become dearer.
It is this realisation that prompted the government’s advisors to suggest an increase in the administered interest rates on small savings if inflation continues to surge.
Late monsoons will also mean a demand-supply gap in oilseeds by about 2.5 million tonnes or a sixth of the total demand. Sugar output, which has also been hit by poor rains in western Uttar Pradesh and Maharashtra, is also expected to come down by an eighth.
This spectre has again forced New Delhi to think of leveraging its huge foreign exchange reserves to import sugar and oilseeds to rein in prices.
But with global prices in both these crops inching up for various reasons this means that even if India spends money importing them, consumers will still face higher prices.
However, the biggest danger stems from the rice crop. If this does not come up to expectations, then it could spell trouble for the country despite the huge stocks the government theoretically has in its silos. "Our rice and wheat stocks are suspect ... we have to see how much of it is fit for human consumption," admits Bhattacharya.