Haunted by inflation

Price rise is one of the key issues in this election, and the latest data on inflation spell bad news for the incumbent UPA government; the monster is rearing its head again after lying low over the last three months. Retail inflation, specifically food price inflation, has rebounded in March on the back of rising prices of vegetables and fruits. Wholesale food prices rose 9.9 per cent with rice shooting up 12.6 per

cent and vegetable prices showing an inflation of 8.6 per cent in March. As a whole, retail inflation was higher at 8.31 per cent compared to 8.1 per cent in February, while wholesale price inflation hit 5.7 per cent in March compared with 4.68 per cent in the previous month. After a period of soft prices for vegetables and fruits, courtesy the winter season, prices have started moving up again. Given that we are still in early summer, food prices are bound to shoot further upwards, as they always do during the season. With unseasonal rains and hailstorm in parts of the country during spring, it is feared that the rabi crop may have suffered damage. This means that foodgrain prices will join the inflation party, cutting deep into people’s pockets. The rebound in inflation only serves to underline the problem of rising prices half-way through the election season, and it spells trouble at the hustings for the UPA government.

The current dispensation will be handing over a troubled legacy to the new government in the form of inflation caused largely by structural problems, especially in agriculture. Food prices have been rising inexorably in the last few years, save brief and intermittent spells of softness due to seasonal factors. It is clear that there are serious issues on the supply side when it comes to food commodities, which the government has failed to address. Tackling these issues will obviously be a priority for the new government. The inflation in respect of manufactured products is a matter of concern indeed, coming as it does on the back of a persisting weakness in industrial output. The latest data have obvious implications for monetary policy, and the Reserve Bank of India, which has now shifted to the consumer price inflation as its benchmark, will be watching closely indeed. It is logical to expect that rates will be on hold until the underlying trend manifests itself clearly. The coming monsoon will be critical in determining near-term inflationary trends, but there are worries there as well with experts talking about the El Nino effect this year. In the past, El Nino has resulted in sub-optimal monsoons in India and policymakers must be hoping that the predictions are wrong. What all this means is that the new government will not have much time to settle down in managing the economy and will need to hit the ground running.