Worry about prices

For 21 successive weeks now, the rate of inflation, measured by the percentage change in the Wholesale Price Index (WPI) over the corresponding week of the previous year, has been above 5 per cent.

For four of those weeks, during January 2004, it rose above 6 per cent. It has fallen below that mark in February, but barely. For those with long memories, this might not be a reason to get terribly worked up.

The economy has had far more severe bouts of inflation before and the conventional wisdom has always been that it is only when inflation is above 10 per cent that it gets politically hazardous.

But conventional wisdom inevitably carries with it the seeds of its own destruction. In terms of the recent tendencies of inflation, 6 or 7 per cent may well represent a new threshold of political danger.

To put the current pattern into perspective, the period between September 2001 and February 2003 saw inflation below 5 per cent for 74 straight weeks.

For much of that period, the rate was below 4 per cent, and even below 3 per cent for a while. It is only about a year ago that the combined impact of the poor monsoons of 2002 and the escalation of tensions in Iraq led to inflation crossing the 5 per cent mark once again.

From February to June, the rate persisted in the 5 - 7 per cent range, but from July until September, when the current streak began, it showed every sign of returning to its previously dormant state.

However, from September onwards, it has been boosted by a combination of buoyant energy prices and rising prices of manufactured goods. Oil prices continue to ride high despite the rather short-lived conflict because of growing demand around the world "" a recovering West and a surging China. Manufacturing prices present a more complicated story.

Normally, the rise in prices would not have come as a surprise, because there has been a reasonably robust industrial recovery in progress for some time now.

But, analysis of production and price patterns reveals that, while this relationship holds true for some sectors, most spectacularly for steel, there are many sectors that are not doing particularly well in terms of production growth but whose prices have risen significantly.

The timing of this inflationary spurt must cause concern to both the ruling coalition and the Reserve Bank of India. The Prime Minister has been quoted as saying that India is the youngest country in the world, with more than half its population below 25.

Well, the young do not have long memories; for many first-time voters, this will be their first experience of 'high' inflation, if at all they have begun to notice it.

As the RBI works towards its monetary policy announcement a couple of months from now, it will need to factor in inflation after a long lay-off.

It has maintained its position that inflation will drop below 5 per cent by end-March, but current trends in energy and manufactured goods prices make that unlikely. A critical decision about tightening liquidity and pushing up interest rates may have to be made.