Low inflation, time for course correction

Inflation at the retail level is at a five-year low of 1.54% for June. The best part is, the common households can see it for themselves at the grocers and more so, fruit and vegetable marts. The numbers reflect more or less the real picture in retail stores, and consumers cannot really ask for more. Wheat, paddy and the entire lot of manufactured food group has witnessed a sharp drop in inflation over the last few months while prices of pulses and fruit have contracted by a big margin in June year-on-year. Along with the Consumer Price Index, data relating to another crucial macro indicator of industrial growth was released on the same day, July 12. If there was good news with regard to inflation, the data on factory output was quite disappointing at a mere 1.7 % for May. Taken together, it would not be incorrect to infer that the low inflation, along with bumper farm production, is also a function of weak demand for a large number of products. Yet another reason for the benign inflation is sluggish scenario in the global commodity prices. Not just this, Indian economy is not in great health with job opportunities abysmally low.

The clamour for a cut in the interest rates is understandable and there is a definite case for it — to boost demand and growth that should lead to investment and job creation. The Reserve Bank of India will take a decision on this in its meeting next month. But to say that there has been a “paradigm” shift in inflation, as has been pronounced by Chief Economic Adviser Arvind Subramanian, would be wide off the mark. Yes, inflation is at a new low, but the credit lar­gely goes to the rain gods, global factors and lack of consumer confidence. Operating at sub-optimal levels, the manufacturers or service providers do not enjoy much of the pricing power.

Subramanian would have been right if prices were tamed by structural policy changes to ensure not only a smooth supply of goods and services but also remunerative prices to the growers of farm produce. Not much seems to have been done in this direction. The farm sector remains in stress, ironically, when there is bumper harvest. If farmers are not paid an adequate price for pulses, onion and other vegetables this season, they would not sow on the same acreage in the ensuing season, leading to supply side constraints again. Besides, nobody is sure about the impact of the Goods and Services Tax on inflation. The way the GST is being rolled out, disruption is inevitable, at least in this fiscal. Wisdom lies in structural changes for long-term stable prices.