Inflation at new high of 7.41%

MIXED SIGNALS FOR THE ECONOMY

Government to take more fiscal steps.

Sharp surges in the prices of vegetable, fruit, pulses, manufactured products and metals pushed the wholesale price index (WPI) to a near three-and-a-half year high of 7.41 per cent for the week ended March 29, 2008.

The inflation rate last stood above this level, at 7.68 per cent, in the week ended November 12, 2004.

Delayed revisions to prices of some items in the WPI basket have also contributed to the spike seen this March (the index rose 2.3 percentage points within the month), raising expectations that the Reserve Bank would raise policy rates.

The government is likely to announce a ban on cement export in a bid to check its rising prices and augment domestic supplies. Cement prices were increased by Rs 5 per 50 kg bag earlier this month.

The government is expected to take more fiscal measures. Meanwhile, Commerce Minister Kamal Nath also announced the withdrawal of export incentives available on cement and primary steel items in the foreign trade policy and said a ban on cement is being considered to augment domestic supplies.

The WPI estimate for the week ended February 2 was also revised upwards to 4.74 per cent, a sizeable revision from the earlier estimate of 4.07 per cent.

"The manufactured products sub-index increased 0.9 per cent week-on-week owing to an outsized jump of 3.8 per cent in the prices of base metals, alloys and metal products, and a 0.8 per cent increase in manufactured food items. The primary articles sub-index rose 0.2 per cent week-on-week to be up 8.9 per cent over year ago," said Rajeev Malik, senior economist, JP Morgan.

The price spike comes even as industrial production growth picked up in February, prompting Malik to say he expects a 50 basis point increase in the cash reserve ratio on or before the April 29 monetary policy review.

Dharmakirti Joshi, principal economist, Crisil, said the price situation remained "very uncomfortable" as far as food is concerned.

"The data are surprising and beyond my imagination. People will have to wait for interest rates to ease and the RBI may actually tighten rates," he said, adding that inflation would moderate in coming weeks as the impact of recent fiscal measures taken to cool prices of items like edible oil get reflected in the WPI.

The data underscore the problems confronting the United Progressive Alliance (UPA) government as it readies to face elections in six states by the year end.

Kamal Nath today said inflation is more of a supply management issue and not caused by a decline in production.

"The production of no essential item has gone down. States should handle this situation," he told reporters.

Nath's comments were echoed by Kapil Sibal, minister of state, science and technology, who said the Centre was contemplating more steps to check rising food prices and had asked state governments to take harsh steps against hoarding of foods under the Essential Commodities (Regulation) Act.

IIP growth at 8.6 per cent

Industrial output growth in February stood at 8.6 per cent against 11.6 per cent in the same month last year.

However, on a sequential basis, industrial growth rose to a four-month high on the back of a better than expected performance in electricity and mining, as well as a revival in capital goods and consumer durables.