Keep blues at bay

The latest figures of general inflation — 10.16% — and food prices inflation — 16.1% — remain causes of  concern. Finance minister Pranab Mukherjee has expressed the view that food prices will go down after the monsoon.

It is more an expectation than a prediction. But economic advisor in the finance ministry, Kaushik Basu, has sought to play down the fears by pointing out that the drivers of inflation based on the Wholesale Price Index (WPI) were iron and steel, which accounted for 3.64%, and raw cotton, sugar cane and jute, and not exactly food prices.

He said that the food price index has remained constant between November 2009 and May 2010. He is right, technically speaking. But that is the economist’s sleight-of-hand in action. The high food prices have not gone down, they just did not go higher. That is not much of a solace to people who are forced to pay more from constrained domestic budgets. The decrease in food prices in real terms is now dependent on the monsoon, something that both the finance minister and his economic adviser have acknowledged.

That is why, Basu sought to explain away the double digit inflation rate in two ways. First, he said that the May figure of 10.16% is lower than the revised inflation rate of 11.04% in March. Second, he said that the core inflation rate — after taking away fuel and food prices — actually stands at 5.8% and it should go down below five% by the end of the financial year. The proverbial silver lining is the figure for Index of Industrial Production
(IIP) standing at 17.6% for April 2010, led by manufacturing growing at 19.4%.    

It would seem then that the inflation will settle down at lower levels in due course and that this would not hopefully necessitate hike in interest rate on the part of Reserve Bank of India (RBI). Of course, the finance ministry stays politically correct by saying that it is the call of the central bank.

It could be that the intricate ways of determining inflation could keep the fears of inflation down and that monsoon would come to the aid of an economy that is still crucially dependent on agriculture. Of course, this is betting on hope but there are good enough reasons for doing so.  Also, it is another way of keeping inflation blues at bay.