Rocket science of inflation: What goes up may not come down

Stagflation is all about persistent high inflation and a powering down of the economy.

Stagflation is all about persistent high inflation and a powering down of the economy. Many economists are now concerned that the India story and the ambitions of double-digit growth rates will fall prey to a rocketing inflation that has touched a 13-year high of 11.05 per cent.

India has had a remarkable run for the last three years with growth rate averaging over 9 per cent between 2005-06 and 2007-08. 8220;But these were gains of all the nice things we did earlier,8221; says Rupa Nisture, chief economist, Bank of Baroda. In the last two years, India has not really let market forces take care of the disequilibrium 8212; the most important being fuel prices. A banker, who did not wish to be named, said, 8220;When crude oil prices were going up, the government must have passed it to consumers in small doses over a period of time. A sharp or consolidated increase now is politically untenable.8221;

Further, the conflict between the monetary stance of the RBI and the government8217;s interventions is not helping mitigate inflation. 8220;While the RBI pursues a tight monetary stance, the government asks banks to hold their rates to keep the growth momentum on. Naturally, the RBI8217;s move to hike repo rate has not translated into an increase in the long-term rates of banks,8221; said another banker. Only two banks 8212; J038;K Bank and HDFC Bank 8212; have raised their prime lending rates.

And the high levels of inflation are unlikely to reverse in the next few months. Indranil Pan, chief economist at Kotak Mahindra Bank, expects it to go towards 12 per cent. Yes, the June 5 hike in fuel prices did contribute to the sharp spike in inflation for the week ended June 7. The index for fuel, power, light and lubricants rose 7.8 per cent for the week. But the price rise is not concentrated in just a few commodities. Prices have risen across the board 8212; be it basic goods such as steel and cement or food items such as edible oil. 8220;All these have strong forward linkages and will have a cascading impact on the economy,8221; says Nisture. Another economist who did not wish to be named said the domestic management of prices was converting the short-term price shocks into persistent high inflationary trends. 8220;It8217;s more about managing inflationary expectations than inflation itself,8221; says Haseeb Drabu, J038;K Bank chairman.

Most bankers and economists expect the RBI to increase the repo rate or the CRR or both. 8220;The primary lines of credit are restricted to few sectors such as telecom and roads. Bank credit, a leading indicator, is quite discouraging,8221; said the chief of a big public sector bank.