INDIA BUSINESS WORLD - MAY - JUNE 2007
The Month that was ...

INFLATION LEASHED TO 4 MTH LOW

Increase in prices the main concern of the UPA government in the last few months appears to be moving southward. Inflation rate settled to a fourmonth low of 5.44% for the week ended May 5. With inflation showing a steady decline over the last few weeks, the government is now working towards bringing it down to sub 5% level.

Prime minister Manmohan Singh assured Parliament that the UPA government is hoping to rein in inflation within this level. However, the government may have to do some tightrope walking as the wholesale prices of food articles, fuel, power and manufactured goods continued to rule firm.

On its part, the government has decided to continue with its policy to rein in the rising prices through fiscal measures and import of food articles to ease the supply side crunch. Although the fall in prices of some food articles such as moong, barley and sugar, among others, have come as a relief for consumers, staple foodgrains such as wheat and rice continue to rule firm. The prices of fruit & vegetables rose 3% compared to the previous week. Consumers, who have witnessed a hike in their home budgets for quite some time now, thanks to increasing interest rates on home and car loans, are still paying a lot more on their food bills compared to 2006 07. Prices of most food articles such as rice, wheat and pulses were significantly lower in May 2006.

However, the WPI for most categories saw a spurt in the week ended May 5 compared to the previous week. While the price index for primary food articles rose 0.7%, that of fuel power and light saw an escalation of 0.4%. While manufactured product saw a marginal increase of 0.1%, the index for manufactured food articles such as sugar, atta and maida etc saw a decline of 0.7%.

According to economists, the drop in inflation rate continues because of a higher base last year. The wholesale price index (WPI) figures on which inflation is based moved up 0.5 points to 211.4 in the week ended May 5 from the previous week. The index moved by a greater margin of 0.9 points last year. "While the base effect has a role to play in lowering inflation, the monetary tightening of the economy has lowered inflationary expectations.

The prices of primary food articles rose 10.5% since last year in the week ended May 5 and manufactured products inflation also stands at 5.2%. According to economists, the advent of the rabi crop -that mainly comprises wheat, some pulses and oilseeds - that is available in the markets now has eased the supply side constraints to some extent. Often described as agricultural seasonalities, this is expected to be one of the factors that could play a role in inflation rates.

Some experts feel that inflation has not fallen as much as it was expected to. Crisil had projected inflation at 5.3% for the week ended May 5. "I had projected inflation to stand at 5.53%. The rise in the index was, however, more than expected because of the unexpected 0.8% increase in the prices of the chemicals group that has a significant weight in the WPI basket," Mr Chaudhuri added.

Besides chemicals, the other manufactured products where there was a rise in prices included cotton yarn, the prices of which rose 2% and machinery and machinery tools which grew 0.6%. However, the prices of basic metals and alloys declined 0.1%. The last time inflation was this low was 5.43% in the week ended December 16, following which it exceeded 6% till it dropped to 5.74% in the last week of March.