Inflation near zero but food bites

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  • Published 19.03.09

New Delhi, March 19: Inflation tumbled today to a historic low at 0.44 per cent but there was no whoop of euphoria either from the Manmohan Singh government or the markets.

Economists had predicted that inflation — which, unlike other nations, is measured against wholesale prices in India — would head below one per cent this week. However, it fell below half a per cent and is widely expected to dip below zero next month.

But for voters who line up at the election booths next month, this is a mere statistic since the prices in retail markets continue to remain high.

Inflation measured by the four consumer price indices hovers well above 10 per cent. The basket of items in these indices is different from the wholesale index. Food prices have a roughly 70 per cent weight in the consumer price indices.

Economists said the fall in inflation could provide greater headroom to the RBI to announce another round of interest rate cuts. However, bankers in Mumbai were sceptical about such a possibility as the central bank has already trimmed the rate-signalling reverse repo four times in the past seven months. The reverse repo is the rate at which commercial banks park surplus cash with the RBI.

One source of worry for the Manmohan Singh government is the fact that wholesale prices of food items are still rising by 7.4 per cent over last year’s levels.

“Energy and manufacturing product prices have come down but the food prices are still rising,” said D. Joshi, chief economist with credit rating agency CRISIL. “This means that the man on the street is still feeling the pinch at a time when the prospect for pay rises isn’t great.”

“The decline in inflation is more because of the higher base last year than any significant drop in prices,” admitted cabinet secretary K.M. Chandrashekhar.

Global crude oil prices had started rising a year ago and had peaked at over $140 a barrel in July 2008, which sent the wholesale index soaring. Crude oil prices have since moderated to $50 a barrel.

Wheat prices have risen by a third in the past two years from Rs 900 a quintal to Rs 1,200 a quintal in the wholesale market. Sugar has almost doubled from Rs 13 a kg to Rs 25 a kg. The retail price of rice has risen from Rs 15 a kg to Rs 22 a kg.

Rising food prices have had a critical impact on election outcomes. In 1998, the BJP lost power in Delhi and Rajasthan after onion prices rose six-fold. Yogendra Yadav, psephologist and political commentator, said: “Common people are not concerned with what economists describe as inflation numbers but rather with price rise and livelihood issues.”

Added Sudha Pai, of JNU’s Centre for Political Studies: “People generally do not like a price rise and often tend to punish incumbent governments because of it.”