This bout of inflation was unexpected

Crisil director and principal economist D K Joshi opined, “The global scenario is very tight, especially from the food grains point of view. Oil and wheat prices have shot up significantly.” Metals too have made a major contribution. “The key reason is the sudden spurt in iron and steel prices over two weeks — those beginning on March 8 and 15. This was perhaps due to a compression in the revision of prices to these two weeks.”

If the rise was so visible at the global level, how come no one saw it coming?

Barua explained, “It is just that the data seem to have come into the office of the economic adviser at this point of time. So, whatever revision was due became compressed into these two weeks.” Information dissemination seems to be holding the key to the delivery mechanism. “We need to get the data collected in time and the process needs to be more streamlined,” added Joshi.

Fiscal measures having been adopted, monetary tightening is the next step that the Reserve Bank of India (RBI) is most likely to go ahead with, during this month’s credit policy meeting. Does that suggest any kind of softening in inflation? No, say economists, as it is hard to predict global commodity prices. “I don’t see them softening in the near term and it seems that the pressure will be sustained for now. I see the inflation rate being sustained at around 6-6.5 per cent,” noted Joshi. There are other views too which see a slight moderation coming in. “Once the fiscal measures kick off and the base effect too begins to have an impact, we may see inflation coming down to the 5.5-6 per cent range after about three weeks,” observed Barua.

While this sort of inflation is likely to prevail, it seems that the growth rate of the world’s second fastest expanding economy will see some revision. If Inflation continues at these levels for some time, it will demand stringent monetary measures that will lead to a rise in interest rates, which in turn will impact the growth of the economy. “Any monetary tightening will slow down growth and will impact more interest-sensitive sectors first,” added Barua. While there was talk of 9 per cent plus gross domestic product (GDP) growth rate only six to 12 months ago, the expectations have taken a hit. “I expect GDP growth rate of 8.3 per cent for the financial year 2008-09,” he said.

Now, is there anything that can be done to contain inflation?

Joshi said, “In the short run, one will have to monitor inflation carefully and make allocations well in advance. Also, imports should be carried out in time.” There is an urgent need to rehaul and revise the WPI and the weightages, as the production structure has changed significantly, added Joshi. “It needs to be more reflective of the true rate of inflation.”

Thus, while it must be accepted that the current high inflation levels will hurt the common man, it also needs to be seen how bad the situation becomes, especially for those who have a home loan, once the monetary tightening measures come in place.