No let up in inflationary pressure due to price rise

The inflationary pressure on the economy is unlikely to subside in the current financial year because prices of important primary articles and manufactured goods are likely to rise.

The recent rise in the wholesale price index is largely on account of a combination of increased prices in food items and fuel.

On top of this, the current indicators on the monsoon front are not encouraging and this would result in a firm trend in primary article prices in the current fiscal, N R Bhanumurthy, associate professor at Institute of Economic Growth, said.

Manufactured products are another area where the price trend is likely to be firm up this fiscal, felt Samiran Chakraborty, chief economist of ICICI Bank. The recent hike in fuel prices would eventually show up in the price trend in manufactured products.

The Reserve Bank during its April 2006 annual policy statement forecast inflation rate would be in the range of 5-5.5 per cent at the end of March 2007.

Soumitra Choudhuri, member of the Prime Minister's Economic Advisory Council, said inflation rate would be contained in the range forecast by RBI. Bhanumurthy, however, said the inflation rate in March 2007 was likely to be in a higher range of 5.5-6 per cent, primarily on account of firm price trend in primary commodities and the statistical impact of a low WPI base in March 2006.

The scenario of upward pressure on prices in the remaining part of the current fiscal follows a marked recent increase in the index values of primary articles and fuel in the overall WPI basket. The government has released data for Consumer Price Index (CPI) for Urban Non-Manual Employees only till May 2006. The CPI-based annual inflation rate in May 2006 was 5.8 per cent, higher than the WPI-based annual inflation rate of 4.1 per cent.

More than fuel, it's food prices that CPI is sensitive to, Choudhuri said. Once the rise in prices of fuel and primary articles are factored into CPI's June value, the annual inflation rate for non manual workers in urban India will increase.

Wheat, fruits, vegetables and pulses are some items that have pushed up WPI recently, Saumitra Choudhuri said. He described the price rise in wheat as an "output augmentation issue." Wheat production in India has been stagnant for a few years, while the rise in prices of fruits and vegetables is temporary phenomenon caused by seasonal shortages.

The government's recent counter-measures, which included increasing wheat availability through imports, has helped ease the pressure on its price, Choudhuri said. The arrival of imports would have made some people liquidate stocks quickly, he added.

The government's decision to increase fuel prices has also contributed to the recent inflationary pressure. The rise in fuel price, however, has not contributed to inflation as much as people thought, Samiran Chakraborty felt.

One reason for the muted impact of fuel price was the government's decision to pass through only a portion of the increase in international price of crude to Indian customers through the hike in petrol and diesel.

At the annual general meeting of BIS in Switzerland on 25 June, RBI Governor Y V Reddy said: "In our case, pass through of higher oil prices has been halting and not full. Thus, the headline inflation in our country in a way understates the problem."