Recession rescues Sinha as inflation continues falling

Domestic recession came to the rescue of finance minister Yashwant Sinha and RBI governor Bimal Jalan as it, with other reasons, pulled down the inflation to a historic two decade low of 2.21 per cent in the post-reform period. Though Sinha may have downplayed the market fears, the movement in the retail price segment is not all that rosy as all India consumer price index (for industrial, rural, agricultural or urban non-manual labour) stood above Wholesale Price Index (WPI), although there cannot be any divergence `in-principle`.
Although the base for WPI had been changed, it had not been changed for the CPI for the last 20 years, during which the consumption pattern itself had changed to a great extent. Belying the expectations of many including Brettonwoods sisters - World Bank and IMF - and other leading think tanks in and outside India, who had predicted an over five per cent rate till the end of this fiscal, commodity prices went on downward spree in the last phase of 2001, breaking many lowers at one stroke.
It is to be noted that on a year-to-year basis, the latest reported inflation stood in sharp contrast to a near nine per cent mark in the previous year.
An average household, especially in the formal sector, might seem rejoicing over falling commodity prices but the worrisome problem had been the price rise for the inelastic primary commodities including fruits and vegetables.
More economists have attributed the southward movement of prices to fall in the consumer demand because of lack of purchasing power. Hence, large stockpiles of grains in the warehouses of Food Corporation of India (FCI), fall in global oil prices, apart from the contagious domestic recession, which was mostly felt in the manufacturing sector. However, ground reality is something different as voiced by the most vulnerable people in the Lowest Income Group (LIG) without much of a difference even among the people just one step above them.
Even as inflation kept on falling, the prices of fruits and vegetables and other commodities like eggs, meat, fish and coconut oil rose, making it difficult for people to make both ends meet.
“We know nothing about the change in the price level. It might have fallen to lowest-ever figure, but we find purses going empty within the first few hours of getting the hard-earned income,” rues Rani, a maidservant, who is in the unorganised sector that employs over 70 per cent of the labour force in the country.
Going one step ahead to the average class-IV employees in the government/quasi-government and private sector, the views are not much different, except for the fact that they kept a watch on the inflation since it mattered in the calculation of dearness allowance. In this context, the contention of the credit-rating agency ICRA holds good that the annualised inflation in primary foods, other than foodgrains, had been rising sharply, showing an annualised acceleration of 14 per cent.
Coming back to the nitty-gritty of inflation, fuel groups comprising power, light and lubricants remained stuck for a majority of weeks, thus enabling Jalan and Sinha to vociferously say that core inflation was low because of this subdued effect, even when the rate way ruling as high as over eight per cent.
The energy price revision in 2000 did lift the inflation beyond many psychological barriers of rbi `babus` although they kept on harping that there were no benchmarks.
In this context, it would be worth mentioning that oil imports had also gone down and there was hardly any demand from the industrial segment. Coming back to the CPI, earlier the sharp increases in energy prices and its much larger weight in the WPI basket, coupled with larger basket of food and final services items in the CPI baskets, had kept the reported consumer price inflation below that of WPI inflation.
Interestingly, ICRA noted the discrepancies within the various consumer price indices in its latest report, saying that CPI-UNME had shown an average increase of 5.5 per cent for the 12-months period ending September, 2001, below the 6.5 per cent of WPI inflation, while CPI-IW showed only 3.2 per cent rise during the same period.
This discrepancy between the movement of different price indices, which had taken an acute form in the summer of 2001, has become less pronounced in recent months, ICRA said.
The dipping of inflation rather exposes another breakdown of text book economics that inflation was too much money chasing too few goods. Despite over 16 per cent growth in broad money supply (M3) and at just above five per cent GDP growth, inflation was on the sliding spree, showing the weak linkages in monetary system.
In the light of above-mentioned factors, the inflation might remain subdued with many economists predicting that it was likely to remain near two per cent as long as demand picks up, which in turn, is again dependent on how soon the economy as a whole revives.
Economists also say the inflation would soon rise with growth spur in the economy, but certain ambiguities are there on the nature, whether it would be cost-push or demand pull inflation.
But the revival of economy itself has sparked many questions on the sustainability of inflation since as and when demand rises, there would not be a commensurate supply of goods and services because of inherent capacity constraints in the system or more due to lack of additional capacity creation because of choked fresh investments. With an already high growing money supply of over 16 per cent, would the economy have the shock absorbers is a question that had not been addressed properly by the policy makers and planners in the government.
It is also to be noted that from April, 2002, the administered price mechanism for oil sector also goes and what would be the impact then?
Bureau Report