Oops!

WHY do prices always go up? Especially after the budget? That's the question the man on the street, the housewife, the beggar, the labourer, the average farmer and the white-collar worker are most concerned with. That's the question they always ask the finance minister on TV. And that's the question the minister or the policy-maker almost always fail to answer.

This year, however, there's one small consolation for the finance minister. The prices had started inching upwards since the beginning of 1998. Inflation measured by the wholesale price index (WPI) averaged 5.8 per cent in January, compared to 4.5 in the previous month, and 3.9 in November 1997. But it graciously came down somewhat to hover at just above 5 per cent in the next two months, before starting to rise again in end-March, thus allowing the United Front government to end fiscal 1997-98 with a very decent 4.9 per cent inflation. The government, understandably, crowed, especially since the year before had ended with 6.7 per cent.

In the current fiscal, the new government may have to eat crow, because from all indications, inflation is poised to return to double digits. Says Anushree Sinha, senior economist, NCAER, which predicts the movement of economic indicators: "The precise calculations of the budget impacts are not yet ready. But considering the liquidity overhang, the existing inflationary pressures, and the budget tax measures, it's quite possible that inflation reaches double digits by the end of the year." Adds economist Bibek Debroy: "There's every chance of a severe cost-push inflation this year."

 Ensuring low inflation is the best thing any government can do for the poor, believed former finance minister Manmohan Singh and former RBI governor C. Rangarajan. And they did work hard to keep the genie bottled. Result: India has not had double-digit inflation for the 165th week now. (The last record was made in 1993 when inflation stayed single-digit for 52 weeks). Many—notably the government and industry—feel that is too much of a good thing and like all other good things must come to an end sometime. Also, they argue, India has achieved this at a cost—by keeping the noose tight on credit, drying up plan investments, and smothering growth. It's high time, therefore, to let go of the prices and fuel growth.

Juvenile argument? Perhaps not, but definitely one-sided. Inflation does benefit industry, by boosting sales figures, thus allowing more margins, and by decreasing real corporate debt. Government too gains in the short run—its debt diminishes, thus giving it more leeway to borrow. Plus it can buoy its excise collections which are mostly calculated ad valorem. But the individual consumer really gets his nose rubbed in the sand—not only does his real income diminish but his savings too earn lower spreads.

But then, which party, unless it's in the Opposition, worries about the consumer? Committed to the domestic industry's cause, the BJP government decided to give in to its demands, primarily the plea to slap an 8 per cent countervailing duty on imports (which has since been cut down to 4 per cent). This and the tremendous pressure to earn maximum revenues, to extract money for infrastructure investment (as industry wanted) and bridge the serious fiscal gap, forced the government to unveil a severely inflationary budget. In so doing, the government royally ignored the inflationary pressures already building up in the economy.

In foodgrains, for instance, where production is expected to fall short by about 7 million tonnes. Says the Economic Survey 1997-98: "Fiscal 1998-99 would require special efforts at supply management to offset the possible shortfall in foodgrains, sugar and cotton production." And oilseeds output. Thanks to the rise in prices of food and primary articles, WPI has risen steadily over March-April to hit a 54-week high of 6.14 per cent in the week ending May 9. And the consumer price index, which measures the retail price level for three different categories—industrial workers (IW), urban non-manual employees (UNME) and agricultural labourers—has risen higher. The CPI is a more accurate barometer from the poorer consumers' point of view as it gives more weight to food, around 57.5 per cent, and considers prices prevailing at fair price shops. However, trade unions have justifiably demanded that the food weight be raised to 60 per cent, and the prices changed to open market levels.

LAST fiscal, inflation measured by CPI (IW) was 9.1 per cent compared to 10.8 per cent in the previous year. In March and April this year, it has shown a declining trend from the high of 9.7 achieved in December. But CPI (UNME) has risen in the same period to touch 7.8 per cent in April. The interesting thing about the CPI is that it always follows the WPI with a small time lag (see chart). So, it could very soon touch double-digit levels.

 Apart from natural causes, the huge indirect tax incidence in the budget is certain to push up the prices of all consumables. The 4 per cent countervailing duty effectively translates into 6-8 per cent duty on most consumer goods, including white goods, which are included in the price indices as manufactured goods, resulting in a final duty incidence of about 80 per cent. As Vijay Crishna, MD, Godrej-GE Appliances, says, "an across-the-board hike does not take into account the adverse impact on the raw material and component inputs of goods manufactured for domestic use and would only be disadvantageous to manufacturers in India."

Then there are the excise duty hikes amounting to a total revenue increment of Rs 5,000-odd crore. All value-added and branded milk products like butter, cheese, ghee and sweets, powdered milk, branded spices, branded edible preparations and packed tea, items of average middle-class consumption and included in the price indices, are set to be costlier, thanks to an eight per cent excise duty. The tea price hike will have the most pervasive effect. For, according to the Tea Packeters Association of India, the average rise in tea price could be Rs 12 per kg. This would impact the 70 per cent of Indian households earning less than Rs 5,000 a month which consume packed tea. Even half of rural households in India consume packed tea, claims the association.

 Only a revival of industrial demand could have offset the inflationary impact. But, says Sinha, "there are hardly any signs in the budget pointing to an industrial revival." Especially since the subdued wholesale price levels of the last two years were basically the result of stagnating consumer demand and lower incomes. Cribs CPI MP Gurudas Dasgupta: "As a result of the budget proposals, inflation might not only cross double digits, but we might also end up with the highest price rise figures in recent history."

However, inflation is also dependent on the financial sector of the economy and a conservative monetary policy pursued by the Reserve Bank may rein it in. Interest rates continue to be low, but money supply is still easy—and growing at 17 per cent for the last three years. With government borrowing this year likely to touch record levels, credit conditions may not really improve much for industry. The only cushion here is the promised government investments in infrastructure, agriculture and housing, if they materialise. Says Arun Bharat Ram of SRF Ltd: "There are some measures to stimulate demand, like housing, power, roads which might have a positive cascading effect on the industry." But that could still be a big if, now that the government has rolled back the entire urea price hike and halved the countervailing duty. If the fiscal deficit target shows signs of breaching midway through the year, it could pull the price level asunder.

The third factor is the value of the rupee. Since end-1997, the rupee has already depreciated by almost 10 per cent. Another five per cent is expected. A 15 per cent depreciation along with the sops announced on Friday by the RBI could help push exports, already rising, and impact the price level. Inflation (as measured by WPI) can then show signs of abating before it can touch double digits. The finance ministry has already indicated that the monsoons are expected to be normal, with 99 per cent district coverage. That, of course, remains the ultimate future cushion, both for the price level and the economy. For now, however, do not expect any silver linings on the price front.