Issue – inflation and near future
Posted by dipanksaha on February 25, 2007
Here I would like to discuss some general issues regarding inflation. The latest detailed report, available from RBI, says inflation is at 6.73%. This is the highest since 2001-02. Crucial contributors are primary products at 12.3%, fruits and vegetable at 19.1%, edible oils at 14.7, cement at 15.8% and iron steel at 15.4%. The most important issue regarding the current rise in wholesale price index (WPI) is the contributors behind such rise. Agricultural items, especially the primary items contributed the most followed by manufactured items like edible oil, cement and Ferro-metal. Generally it’s considered that farm products’ prices are season in nature. As the harvest comes closer prices go down unless some serious casualty is found in production. Price of agricultural product goes up in far months when economy depends on the food stocks. Currently, there are issues regarding hampered farm output because of some weather mishaps. Especially the onion, pulses, grains are affected most. But in agriculture, weather related casualty measurement is difficult. So nobody can confirm actual future shortage of production, which we are going to suffer, only speculations are whirling around. Number of consumer in short term is fixed and consumption is not going to rise in multiple folds. As soon as the production starts coming and supply situation gets clear we can expect less volatility since agricultural product led inflations are mainly supply side problem.
On the other side, price rise of cement and Ferro metal are mainly due to increased demand for winter related construction boom. Here supply is not going increase much in short term. To stabilize the price demand needs go down at lease to some extent. As summer season is going to spread over the country in few weeks we can expect some down in construction demand, simultaneously lesser demand for the construction inputs. So, by the rule of nature (!!) we can expect some relief in inflation situation by end of March or first of April.
Moreover Indian politics is highly inflation sensitive. With more than one state level election on the card Central Government is quite aggressive to stable the commodity price. So we can expect inflation to slow down very soon.
As the farm price volatility is a regular annual event and issue agricultural productivity has become serious we can expect some policy measure and planned expenditure on this part in forthcoming union budget, which is due on 28th February’2007.
