Fragile numbers

The July inflation numbers just in should warm the cockles of policy makers’ hearts, though a sustained momentum on this front is not expected in the face of core inflation being up 5.44 per cent from 4.9 per cent in June. The inflation on the wholesale price index (WPI) dipped below 7 per cent during July —for the first time since January 2010—from 9.36 per cent a year ago, but the key maladies confronting the Indian economy by way of sustained pressure on food and commodity prices, lower corporate margins, constricted manufacturing output and slower capital goods output could maintain inflationary pressure on key segments of the economy. That fuel inflation, an important component of the weekly WPI inflation index, has been contained, is more a triumph of political and popular pressures against further petrol price hikes than efficient management of the burgeoning oil import bill and streamlining of upstream costs. While food prices, which constitute 14.3 per cent of the WPI basket, have eased mildly, higher transport, procurement and storage costs continue to weigh in on key food items like cereals, potato, rice and protein-rich foods like pulses, string beans, milk, fish and eggs.

Clearly, higher incomes and purchasing power have tilted the consumption scale in favour of protein-rich foods over the last decade, and consequently, skewed the balance of power in food inflation computations. This is notwithstanding the fact that vegetable prices showed the highest rise of 24.11 per cent in July, while non-food articles hovered in the 8 per cent range. The jury is still out on arguments from many quarters for according higher weightage for manufactured items in the WPI index. But this may not be desirable in a scenario where manufacturing output looks set to dip further. Besides, given RBI’s lower GDP outlook for 2012-13, a higher weightage for manufacturing may serve little purpose. 

The fact that continued price rise in manufactured products (5.58 per cent in July) continues to weigh down the inflation index cannot be ignored. A case for a interest rate cut may not be too strong in the face of these numbers, which in the end analysis, are all too mortal. Fiscal consolidation, subsidy restructuring and tight expenditure control are unqualified measures to be carried through by finance minister P Chidambaram for the larger results of an inflation ‘correction’ to become evident.