Email
Print
ShareThe speed of descent in the inflation rate based on wholesale prices --- it has dipped to a low of 3.03% for the week ended February 21, 2009 --- suggests that very soon, India may witness a spell of deflation.
Though the temptation to attribute this to the economic slowdown and the resultant weakening demand may be understandable, the real reason may be the administered price mechanism for several key petroleum goods like diesel, petrol and kerosene.
Otherwise, how is it that the easing of the inflationary pressures at the wholesale level has not percolated to the retail level where the price rise continues to be in double digits --- it was 10.45% for the consumer price index for working class, 11.62% for agricultural labourers and 11.35% for rural labourers for January 2009.
Consider the issue from the index number for the fuel group in the wholesale index. On a year-on-year basis, while the number for primary articles has gone up by 6% during the week ended February 21 and manufactured goods by 4.51%, the fuel group index was down by 3.98%.
In effect, this decline in the fuel index is responsible for the very low figure of inflation during this week. From the angle of weighted average contribution, the inflation rate has been dragged down by as much as 28.45% on account of this fact.
As is well known, the Indian consumer is insulated from the movements in the price of crude abroad to a substantial extent as the government fixes the price of major petrogoods from time to time.
As such, the wholesale index for the fuel group stays frozen for a long spell of time, till another round of price revision is announced by the government. This practice has a moderating impact on the overall inflation rate.
This is clear from the latest data. For the week ended February 21, the fuel group index stood at 323.5 as against the year ago level of 336.9. If the market was allowed to have sway, the year-ago fuel index would have been even higher and hence the then inflation rate.
Likewise, if the administered regime was not in vogue, may be the index for the fuel group would have been lower now than what it is --- and this would have influenced the inflation rate too --- in view of the distinct softening of crude prices of late.
A deeper look at the fuel index will make this clear.
Thus far in 2009, despite the steep fall in the Indian basket of crude, the wholesale index for fuel group has oscillated from a peak of 330.0 to a trough of 321.8 with this index slightly up for the week under review.
But, what is the peak this year was nearly the trough for 2008 --- 330.2. In that year, the index had scaled a high of 380.4 so that, at present, the fuel index has slumped by 15.4%.
In 2007, the fuel index was at a high of 332.7 and at a low of 318.9; in the event, the latest index is not appreciably different from what it was two years ago whether in relation to the peak or in relation to the trough.
As a matter of fact, the high of 330 so far in 2009 is lower than the high of 332.7 in 2007. The point to note is that the WPI-led inflation rate is impacted by the pricing mechanism for petroleum products, with this group commanding a weight of 14%; with the weight for manufactures at a sizable 64%, the low weight assigned to primary articles does not fully capture the inflation prevalentin this segment, which matters to the common man.
This also explains the disconnect between the measures of inflation based on various consumer price indices and the wholesale index. And, why even within the wholesale index, both primary articles and manufactures have not recorded a deeper deceleration in their index rates.
