Hard times for India as inflation surges again

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After a three-week respite, food inflation is back to haunt us. Data released on Thursday show food inflation measured by wholesale prices at 10.05% for the week ended March 12, up from 9.42% the previous week.

Any hope that the spike is a one-off development and inflation will soon resume its downward trajectory is belied by two factors. One is the large-scale disruption in rail and road traffic caused by the on-going agitation by Jats seeking caste-based reservation in north India. The other is higher global commodity – especially fuel – prices.

While the pass-through on account of higher fuel prices may not happen immediately, given impending elections in five states and the already high inflation, the impact on prices cannot be suppressed for long.

Fruit and vegetable prices usually rise in the summer months, and that does not augur well for food inflation. Inflation also seems to have spread to non-food items – non-food manufactured goods inflation increased to 6.1% year-on-year in February and the inflation number for December was revised up to 9.4%, up from 8.4% earlier, so the outlook on the inflation front is not bright.

This, perhaps, explains why the RBI has been consistently raising its projected inflation rate for end-March 2011; it is now 8%as against 7% earlier. It has also been raising interest rates, steadily if somewhat slowly. But monetary actions yield results with a lag. Moreover, the government has made its preferences clear. If there is a trade-off between growth and inflation (a debatable point), the government wants growth, even if in the process it means a new higher normal for inflation.

The moderate fiscal deficit budgeted for 2011-12 gave some momentary comfort on the demand front. But the increase in subsidies on petroleum products and fertilisers as a result of high crude prices coupled with the prospect of expenditure overshooting Budget estimates suggests the fisc is unlikely to lend a helping hand in demand-side inflation management. With the fisc unwilling to chip in and the RBI unable to do much more, where does that leave the aam aadmi? As always, at the receiving end.
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