Good & bad news on inflation, WPI

The wholesale price index at an 11-month high is a double-edged weapon. It’s bad news for consumers but godsend for manufacturers whose pricing power rises. This should pose a challenge for the government as it has to find ways to meet the increasing fuel rates, which are likely to go northwards, at least for a while. January’s inflation was fuelled primarily by high fuel and power rates. The global scenario doesn’t look benign given the Middle East turmoil and the uncertainty over US President Donald Trump’s unconventional policies.

The government has two options. It can either lower the duties on imported fuel or subsidise kerosene and LPG. The second seems a better alternative as it reaches its target audience. State governments, particularly, must cut duties, which form a sizeable chunk of the cost of fuel to the consumer. Aadhaar’s implementation has ensured the subsidies go to the right people and leakages are curtailed.

While it’s true vegetable prices are down, this may not last for long as the winter plays out. Much will depend on the arrival of the rabi crop. There is a lot of optimism as the acreage under rabi crops like gram and vegetables increased by 25 to 30 per cent and the moisture in the soil assures the quality of crops. A bumper crop is expected as long a there are no unseasonal rains. While this is good for urban India, as it will keep inflation down as far as food is concerned, the government will have to think of ways to protect the farmer, who never reaps the benefits of his abundant crop due to the government’s urban-centric policies. The farmer will get lower prices and could even suffer losses due to this. The government must find a way to protect his income, specially as Prime Minister Narendra Modi made huge promises to farmers during the election campaign and speaks for them in order to escape the “suit boot sarkar” label bestowed on him by the Congress.

The government also has to work harder in the field of renewable energy to reduce dependence on fossil fuels. Metal prices have to be monitored as they contributed 7.97 per cent of the cost of manufactured goods, which saw a marginal increase. An interesting fact is that retail inflation, which is what the consumer really cares about, eased sharply to a low of 3.2 per cent year on year, compared to 3.4 per cent in December 2016. This, however, may be shortlived as demonetisation played a role in decreasing personal consumption and due to the sharp decline in food inflation, particularly vegetables.

The RBI has been prescient in holding rates in its February policy announcement as it wanted to see the effects of recent events on inflation.