Inflation seen at 5% for 2005

Inflation in 2005 is likely to remain below 5 per cent, but manufacturing may prove to be the flashpoint, say economists. Another factor that can increase costs for consumers is the product patents regime for medicines.

"The inflation rate will gradually decline and will end the fiscal year at 6 per cent. The government is targeting a 4-5 per cent inflation in 2005-06," a Planning Commission official said.

Saumitra Chaudhuri, economic analyst, ICRA, and member of the Prime Minister's economic advisory council, however, said: "The economy needs 3-4 per cent inflation to be comfortable. Higher inflation results, among other things, in problems of capital-flow."

Inflation had become a cause for concern in the past year, especially when it touched 8.74 per cent in the week ended August 28 in the wake of rising international oil and steel prices.

"If international oil prices remain moderate, inflation should range between 5.5 and 6 per cent in 2005," said BB Bhattacharya, director, Institute of Economic Growth.

According to him, three factors will play a major role in determining the level of prices during the year.

"If demand rises, inflation will rise. Demand has been subdued for some time and should rise with economic growth," he pointed out, adding that international oil prices and the prices of medicines and chemicals would be the other major determinants of inflation.

"Manufactured goods inflation was 6 per cent in the week ended December 18, down from 7 per cent at its peak, but the economy is on a high-growth path and that implies a potential for inflationary pressures," Chaudhuri said.

The manufacturing sector grew 9.3 per cent in the second quarter of the fiscal year, as per the latest GDP estimates released by the Central Statistical Organisation last week.

"Inflation will be benign in 2005, but can go higher. Liquidity will also have to be closely monitored to prevent a spurt in prices," Chaudhuri said.

Emphasising the need for close monitoring, he warned that inflationary outcomes became apparent only after a gap of 3-4 months and measures taken to control inflation take another 3-4 months to become effective.