FIRST, the good news. At 6.64 per cent for the week ended April 12, inflation has been on a steady decline for the past one-and-a-half months. Brushing off gloomy forecasts of 9 per cent at year-end, the price graph seems set to close 1996-97 with an average of 6.5-7 per cent. It was 7.8 per cent in the previous fiscal year.
The bad news is that it's probably just a cyclical trough. Says Shashank Bhide, head of research, National Council of Applied Economic Research (NCAER): "Inflation has touched its bottom. Now, prices are set to rise sharper till August-September after which the impact of a good monsoon may reverse the trend, unless there is a change in the pattern of primary articles. And if the rains are bad, then the situation will only get worse." Measured by the wholesale price index (WPI), inflation is more illusory than real. For one, it is singularly inefficient in reflecting the true cost of living for citizens. A better indicator is the Consumer Price Index for Industrial Workers (CPI-IW), a compilation made by the Labour Bureau, Department of Statistics, of retail prices of 260 commodities from all corners of the country. The CPI gives almost 50 per cent weightage to essential commodities, opposed to only 22 per cent by the WPI. But CPI figures do not come in handy as they always lag behind WPI by four months.
But even looking at April-December 1996 data, the difference is astounding. CPI inflation averaged 10.4 per cent in that period, compared to 6 per cent for WPI. In an ideal market situation, which is far from so in India with some prices being administered by the government, both CPI and WPI should converge because production influences consumption and vice versa. They used to till about 1994-95. The widening gulf since then only confirms the WPI's increasing irrelevance to the ordinary consumer.
Says a senior official in the Industry Ministry, which compiles and releases the WPI: "The WPI is being used as an inflation index but it was devised more as a GDP deflator. It is not based on a basket of consumer goods like the CPI but on production sectors of the economy. Of late, it has not been reflecting the structural changes in the economy. For instance, it gives 57 per cent weightage to manufactured products but doesn't include the services sector at all." A working group under Planning Commission member S.R. Hashim is currently entrusted with revamping the WPI operation and its base, keeping these factors in mind.
The second reason for not giving two cheers about the fall in inflation is political. NCAER economist Rajesh Chadha points out: "It's a repressed scenario reflecting more of administrative measures than natural price behaviour. Two postponed decisions—a long overdue petrol price hike and the pay commission suggestions—if implemented forthwith, will translate immediately into a rise of 2.5 to 3 percentage points, pushing inflation dangerously close to the double-digit level." Agrees Bhide: "Inflation in manufactured products has averaged less than 5 per cent last fiscal year, thanks to a slowdown in industrial growth and export-import. This was more due to a policy hiatus. This is what mainly kept inflation low." The tide now is poised to turn.
The third reason is a combination of economic factors. Although primary articles went up by 14 per cent during the year, growth was sharper in January and February following a price rise in cereals and sugar, but tapered March onwards. In the coming months, the impact of the rail freight hike will nullify this effect on both the agricultural and manufacturing sector. Although the July price rise of petrogoods was well absorbed by the system, the fuel group is slated to go up with the price hike of coal and power. Even the industrial slowdown has run its course. Finally, a liberalised credit policy and a high-growth oriented budget will create their own inflationary pressures.
Adds Chadha: "As India opens up further and tariffs inch closer to global levels, imports start affecting industry and markets. To that extent, the price line may be getting more stable. Also, it is getting gradually more and more difficult for the government to manipulate prices, with only a few commodities left in the administered section." Agrees a government economist: "True, we are still far away from the global inflation rate, but the government can no longer hold the price line for a long time. Cost absorption in some sectors will have its impact on other areas." Even the government has to realise someday that there's no free lunch.
