New Delhi, May 16, 2008 : The wholesale price index-based Inflation moved closer to 8 per cent for the week-ended May 3 on the back of rising food and fuel prices. At 7.83 per cent, the inflation rate is at its highest level since November 2004. In the previous week it was 7.61 per cent while in the corresponding week last year, it stood at 5.74 per cent.
Rising prices and slowing industrial output have fanned a inflation versus growth debate again. The index for industrial production (IIP) released earlier this week showed that March output rose a meager 3 per cent, the weakest rate in the last six years. The Government has, so far, placed greater weight on reining in the sharp increase in the WPI-led inflation than arresting the softer slowdown in the growth momentum. The government’s consistent upward revision to the inflation figure of back dates continues. Today, it significantly revised the inflation figure for the week ended March 8 to 7.78 per cent from the provisional figure of 5.92 per cent. Analysts said it would not be surprising if the final figure for the week-ended May 3 crosses the 9 per cent mark. If oil, food and commodity prices continue to increase, there is a risk inflation would touch the double-digit mark in the coming months.
Clearly, the government is in a Catch-22 situation now. Despite a series of monetary and fiscal measures including suspension of futures trading in eight commodities since the beginning of 2007, customs duty cuts on many inputs, temporary ban on exports of foodgrains and tightening of liquidity by hike in cash reserve ratio, inflation has been hovering around 7 per cent for a couple of months now. All these measures have started taking a toll on growth, as reflected in the three-month moving average of industrial output, which has dropped to 5.8 per cent, the slowest since June 2003.
While politically, higher inflation is clearly suicidal for the government - finance minister P Chidambaram admits he can sacrifice some growth at the altar of inflation, India also runs the risk of a slowdown on further weakening of the growth momentum. The only silver lining for the government is a boost to exports because of an unexpectedly depreciating rupee. The rupee depreciated almost 7 per cent this year and stood at a 30-month low of 42.70 against a dollar on Thursday, raising prospects of exporting sectors such...
