If the consumer price index (CPI) numbers for May, released last week, provided some comfort about softening inflation, the wholesale price index (WPI) numbers for the same month, released on Monday, did just the opposite. Headline inflation went up from 5.2 per cent year on year in April to six per cent in May, the highest, by a whisker, since December. This is all the more striking because, of the two indices, the WPI was behaving in a manner consistent with conventional business cycle dynamics. It was steadily softening as growth remained sluggish and demand across the board was widely perceived to be deficient. But inflation in India is complex enough to challenge any conceptual formulation, and so it has done in May. Even the rate of inflation in manufactured products, the segment most likely to conform to this pattern, bucked the trend: it rose from 3.2 per cent in April to 3.6 per cent in May.
The culprit is, as usual, not very difficult to find. Food inflation has been the bane of macroeconomic management for several years and, as it rises and falls, so does headline inflation. It went up by almost a percentage point from April to May. Rice has been a major contributor to this, averaging above 12 per cent year on year over the past few months. This is softer than that in the several months preceding, when it was soaring at about 17 per cent, but still packs a wallop. The other food items that have been persistently contributing to the pressure are milk, eggs, fish and meat.
If it is not already crystal clear, then there is really no hope of winning the battle against inflation unless food prices are brought under control. The government has certainly recognised this as a critical priority, as reflected in the president's address to the inaugural session of Parliament. But the government now needs to move quickly to both articulate a strategy and take some immediate actions. The acceleration in manufactured products inflation is a little more difficult to explain, if demand conditions are still very subdued. It basically suggests that producers are now at the bottom-end of their viable price range and are forced to pass on any input costs to their customers immediately. That is clearly not a good sign for demand expansion coming from lower prices.
With monetary policy hobbled, the onus is completely on the government's response to food inflation. In the immediate term, as has often been advocated by this newspaper, it must carry out open-market sale of rice in order to dampen inflation in the one commodity that it actually can do something about. The reluctance of the United Progressive Alliance government to do this puzzled many; the inaction by the present government could worsen matters. In the longer term, the entire incentive system within which agriculture operates must be reoriented away from rice and wheat and towards the items that have been so persistently driving this enormously problematic food inflation. This is, of course, not going to be achieved overnight, but a credible strategy to deal with the pressures will certainly go a long way towards curbing expectations of a prolonged inflationary episode, already almost seven years long.
