The latest wholesale price numbers for the week ending April 15 show the overall rate of inflation to be about 5.5 per cent over the corresponding week last year. This is the first time in over a year that the rate has crossed the 5 per cent barrier. After the steep spike in inflation in the latter half of 1998, the country has become used to relatively moderate rates. Is the scenario about to change?
The recent history of inflation indicates that virtually all the volatility in the wholesale price index (WPI) is attributable to movements in the prices of primary commodities, mainly agricultural. The prices of manufactured goods have remained remarkably stable. This was partly due to the growing intensity of competition in this sector, brought about by delicensing and trade reforms. It was also the consequence of the large build-up of capacity that took place during the boom of 1993-96, capacity that remained under-utilised during the subsequent slowdown.
If at all the recent inflation numbers are a portent of sustained upward pressure on prices, this should be visible in what is happening to the prices of manufactured goods. There does not appear to be a lot happening on this front. Over-all, the prices of manufactured goods increased by 2.9 per cent over the corresponding week last year, in keeping with the established pattern. Among the major manufactured goods, sugar prices increased by 5.6 per cent, edible oil prices on the whole declined by almost 18 per cent, cement prices declined by close to 2 per cent and iron and steel prices increased by 1.3 per cent. The last two, in particular, are striking in the context of global trends, which suggest an upward movement in major commodity prices. The Indian numbers reflect the persistence of low capacity utilisation in these industries, still not eliminated by the recovery of the past two years.
More From This Section
However, there are reasons to believe that the party may not last for long. The pre-monsoon drought conditions in parts of the country are likely to have an impact on the prices of some agricultural commodities: oilseeds for example. This will also have an unanticipated impact on government expenditure, which could stoke inflation further. On the industrial front, the fourth quarter and annual results of several companies indicate that the recovery is well on its way. Faced with a sustained increase in demand, excess capacity will not last forever. Compounding the impending capacity constraint is the fact that, over the course of the slowdown, investment activity slackened. It will take some time before businesses are confident enough to begin making new investments.
Finally, even as people predict a slowdown in the US economy, it continues to grow, putting pressure on commodity prices. The significant lesson learnt from India's recent experience with inflation is how powerful a force competition is in keeping it under control. Fiscal restraint is certainly a virtue in this regard, but even in its absence, the government can effectively keep prices in check by permitting free imports when threatened by shortages.