The price fever has taken a virulent turn, with the inflation rate for Novemberleapingto 4.78% on a year-on-year basis.
Over the month, the wholesaleindex has hardened by 1.34% and by as much as 7.54% since the commencement of the current fiscal.
This represents a dramatic reversal of the situation that prevailed as recently as August when the inflation rate was negative ( -0.67%) and only modestly higher at 0.50% in the following month.
The interesting question is, will the Reserve Bank of India act to “ensure price stability and anchor inflationary expectations” to use its own phraseology, to tame this virus plaguing the economy by signalling an end to the soft monetary policy it had adopted to stimulate the moribund economy via stimulus packages of its own and the trimming of the key policy rates and reserve ratios?
Or, will it continue the present path, in order not to jeopardise the nascent signs of recovery in industry and, indeed in the economy as a whole?
But, what is happening now is running counter to the RBI expectations.
In its annual credit policy announced in April, it had pegged the inflation rate at 4% by the end of 2009-10; then, in the wake of the erratic monsoon, it had taught it prudent to revise upward its forecast to 5% in the second quarter review in July.
When the extent of the monsoon debacle became known, RBI has again jacked up the indicative target to 6.5%.
Looking at the price movements, the target may fall by the roadside in a matter of months -between October and November, the inflation rate has climbed by more than 300 basis points.
Viewed in a larger context, RBI may not the villain as monetary expansion is still muted - as of November 20, the year -on-year growth , at 18.4%, is lower than the preceding year’s 19.3%, while the incremental increase till this date for the fiscal year is also marginally less at 9.1%.
Looking the wholesale price data and their movements, it is clear that supply-side problems may have much to with the raging inflation.
Kharif crop has been a big disappointment with a setback in food grains alone estimated at 15 million tonnes and a significant drop in the output of vegetables, sugar and milk.
No wonder, then, that food articles have hardened by a staggering 16.71% in October 2009 over the year and food products by 24.7%.
At a disaggregated level, potatoes have become dearer by a mind-boggling 141% and onions by 55%. Pulses and sugar are up by more than 30% and vegetables by nearly 65%.
Thus, the root cause of the price spiral is a skewed equation between demand and supply for many commodities and tightening of the monetary screws may be counter-productive.
Even the deployment of food stocks may not be of much help as these inventories comprise almost entirely of rice and wheat, where quality may not be up to expectations, while for pulses, cereals and sugar, even with imports, the overall supply position is not satisfactory.
Larger imports of rice, sugar and other staples like pulses may help to some extent in quelling the inflationary epidemic but in the long-term, production-boosting efforts are called for.
The flare-up in prices, thus, stems from a demographic phenomenon of too many people chasing goods in a regime of dwindling supplies rather than a monetary phenomenon of too much money chasing too few goods.
The government, and not the RBI, must initiate the appropriate policy responses.
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