New Delhi: Planning Commission warned on Tuesday that wholesale price inflation could end the fiscal year above the Reserve Bank of India`s forecast of 5 percent, as a poor monsoon drives up food prices.
The influential government panel`s caution on inflation follows last week`s statement by the RBI saying this season`s lacklustre monsoon was more likely to drive inflation than erode growth.
"It is evident that if we project the underlying movement in the WPI (wholesale price index) in the current year... we will end the fiscal year with inflation above the comfort zone of 4-5 percent," the panel said in a report.
"The situation could become worse if agriculture outcome turns out to be worse than projected in the base case," it said in a paper prepared for a meeting with the Prime Minister, who heads the planning commission.
"Management of inflation expectations in the course of the year will pose important challenges. Food prices especially will come under pressure if the demand-supply situation is not managed effectively," it said.
The central bank has projected WPI inflation of around 5 percent at the end of 2009/10 (April/March).
The WPI, India`s main inflation measure, has fallen in annual terms for 11 weeks, partly because of the high base effect last year of energy and other commodity prices.
On Monday, the consumer price index for industrial workers showed a surge of 11.89 percent in July from a year earlier.
The panel also said it expected the economy to grow 6.3 percent in the year to March 2010 and at a faster pace in the following years, but warned the poor monsoon could hit growth.
"In the worst-case scenario of farm-sector GDP declining by 6.0 percent, overall GDP growth could be limited to 5.5 percent," it said, referring to the current fiscal year.
The panel, which charts out five-year plans for India, said it expected 8 percent economic growth in fiscal year 2010/11 and 9 percent in 2011/12, it added.
In the current fiscal year, it saw farm growth down 2.5 percent with foodgrain output down 18 million tonnes, industry growth at 7.8 percent and services growth at 8.2 percent.
It added the better industrial performance projected for 2009/10 compared to 2008/09 was crucially dependent on an increase in investment demand.
India`s economy grew at 6.1 percent in the June quarter from a year earlier as government stimulus measures helped spur demand.