India
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NARESH INDIA's central banking authorities Reserve Bank of India maintains that zooming inflation that the country witnessed in the first quarter of the current fiscal 2008-09 and beyond - from 7.7 per cent at end-March 2008 to 11.9 per cent by July 12, 2008- cane be attributed to the impact of some pass-through of higher international crude oil prices to domestic prices as well as continued increase in the prices of iron and steel, basic heavy inorganic chemicals, machinery and machinery tools, oilseeds/edible oils/oil cakes and raw cotton on account of strong demand, international commodity price pressures and lower domestic 2007-08 rabi production of oilseeds. The seasonal hardening of vegetables prices as well as increase in the prices of textiles have also contributed to the rising inflation during 2008-09 so far. Inflation in India is estimated on the basis of fluctuations in the wholesale price index (WPI).
Macroeconomic and Monetary Developments: RBI First Quarter Review 2008-09 * Headline inflation firmed up further in major economies, during the first quarter of 2008-09, reflecting the combined impact of higher food and fuel prices as well as strong demand conditions, especially in emerging markets. Notwithstanding inflation remaining above the targets/comfort zones, the monetary policy responses during the quarter were mixed in view of growth implications of the persistence of financial market turmoil following the US sub-prime crisis. While many central banks in developed countries such as the US, the UK and Canada, which had reduced policy rate up to April 2008, have paused subsequently, many central banks in emerging economies continued with pre-emptive monetary tightening to contain inflation and inflationary expectations on account of excess supply of global liquidity. Apart from independent actions, the co-ordinated move by major advanced country central banks in terms of injection of short-term liquidity aimed at easing strains on the money markets continued during the quarter. Mirroring inflation trends in many advanced as well as emerging economies, various measures of inflation in India have also risen significantly since the beginning of this calender year. In India, inflation based on the wholesale price index (WPI) increased from 7.7 per cent at end-March 2008 to 11.9 per cent by July 12, 2008, reflecting the impact of some pass-through of higher international crude oil prices to domestic prices as well as continued increase in the prices of iron and steel, basic heavy inorganic chemicals, machinery and machinery tools, oilseeds/edible oils/oil cakes and raw cotton on account of strong demand, international commodity price pressures and lower domestic 2007-08 rabi production of oilseeds. The seasonal hardening of vegetables prices as well as increase in the prices of textiles have also contributed to inflation during 2008-09 so far. Consumer price inflation also edged up generally during the first quarter of 2008-09, reflecting increase in the prices of food items and services, represented by the ‘miscellaneous’ group. Various measures of consumer price inflation were placed in the range of 6.8-8.8 per cent during May/June 2008 as compared with 6.0-7.9 per cent in March 2008 and 5.7-7.8 per cent in June 2007.
Primary articles prices, y-o-y, increased by 10.1 per cent on July 12, 2008 on top of 11.1 per cent a year ago (it was 9.7 per cent at end-March 2008), reflecting increase in prices of food articles, especially rice, wheat, fruits and milk, and nonfood articles such as oilseeds and raw cotton. Fuel group inflation increased to 16.9 per cent on July 12, 2008 from 6.8 per cent at end-March 2008 (and a decline of 1.4 per cent a year ago), mainly reflecting the effect of some hikes in the prices of petrol, diesel and LPG in June 2008 as well as continued increase (15-51 per cent) in the prices of freely priced petroleum products such as naphtha, furnace oil, aviation turbine fuel, bitumen and lubricants over end-March 2008. Manufactured products inflation, year-on-year, rose further to 10.7 per cent on July 12, 2008 from 7.3 per cent at end-March 2008 (and 4.8 per cent a year ago), reflecting increase in the prices of edible oils, oil cakes, textiles, chemicals, basic metals, alloys and products, and machinery and machine tools. Prices of sugar and grain mill products, however, eased somewhat from end-March 2008. Consumer price inflation increased further during the first quarter of 2008-09 mainly due to increase in food prices and services (represented by the ‘miscellaneous’ group) prices. Various measures of consumer price inflation were placed in the range of 6.8-8.8 per cent during May/June 2008 as compared with 6.0-7.9 per cent in March 2008 and 5.7-7.8 per cent in June 2007.
commodity price rises worldwide, the opposite is happening. According to the 2008 Economic Survey Report, India’s inflation rate was targeted by the Reserve Bank of India (RBI) to be 4.1%, down from a rate of 5.77% in 2007. Inflation rates for many investment goods have decreased dramatically in recent years. The price of basic goods such as lentils, vegetables, fruits and poultry were expected to slow their rise. The price of various manufactured goods also fell in 2007, and this contributed to a reduced inflation rate
However, the beginning of 2008 has seen a dramatic rise in the price of rice and other basic food stuffs. There has also been a no-less alarming rise in the price of oil and gas. When coupled with rises in the price of the majority of commodities, higher inflation was the only likely outcome. Indeed, by July 2008, the key Indian Inflation Rate, the Wholesale Price Index, has risen above 11%, its highest rate in 13 years. This is more than 6% higher than a year earlier and almost three times the RBI’s target of 4.1%. Inflation has climbed steadily during the year, reaching 8.75% at the end of May. There was an alarming increase in June, when the figure jumped to 11%. This was driven in part by a reduction in government fuel subsidies, which have lifted gasoline prices by an average 10%. The Indian method for calculating inflation, the Wholesale Price Index, is different to the rest of world. Each week, the wholesale price of a set of 435 goods is calculated by the Indian Government. Since these are wholesale prices, the actual prices paid by consumers are far higher.
In times of rising inflation this also means that cost of living increases are much higher for the populace. Cooking gas prices, for example, have increased by around 20% in 2008.
With most of India’s vast population living close to – or below – the poverty line, inflation acts as a ‘Poor Man’s Tax’. This effect is amplified when food prices rise, since food represents more than half of the expenditure of this group.
Macroeconomic and Monetary Developments: RBI First Quarter Review 2008-09 * Headline inflation firmed up further in major economies, during the first quarter of 2008-09, reflecting the combined impact of higher food and fuel prices as well as strong demand conditions, especially in emerging markets. Notwithstanding inflation remaining above the targets/comfort zones, the monetary policy responses during the quarter were mixed in view of growth implications of the persistence of financial market turmoil following the US sub-prime crisis. While many central banks in developed countries such as the US, the UK and Canada, which had reduced policy rate up to April 2008, have paused subsequently, many central banks in emerging economies continued with pre-emptive monetary tightening to contain inflation and inflationary expectations on account of excess supply of global liquidity. Apart from independent actions, the co-ordinated move by major advanced country central banks in terms of injection of short-term liquidity aimed at easing strains on the money markets continued during the quarter. Mirroring inflation trends in many advanced as well as emerging economies, various measures of inflation in India have also risen significantly since the beginning of this calender year. In India, inflation based on the wholesale price index (WPI) increased from 7.7 per cent at end-March 2008 to 11.9 per cent by July 12, 2008, reflecting the impact of some pass-through of higher international crude oil prices to domestic prices as well as continued increase in the prices of iron and steel, basic heavy inorganic chemicals, machinery and machinery tools, oilseeds/edible oils/oil cakes and raw cotton on account of strong demand, international commodity price pressures and lower domestic 2007-08 rabi production of oilseeds. The seasonal hardening of vegetables prices as well as increase in the prices of textiles have also contributed to inflation during 2008-09 so far. Consumer price inflation also edged up generally during the first quarter of 2008-09, reflecting increase in the prices of food items and services, represented by the ‘miscellaneous’ group. Various measures of consumer price inflation were placed in the range of 6.8-8.8 per cent during May/June 2008 as compared with 6.0-7.9 per cent in March 2008 and 5.7-7.8 per cent in June 2007.
Primary articles prices, y-o-y, increased by 10.1 per cent on July 12, 2008 on top of 11.1 per cent a year ago (it was 9.7 per cent at end-March 2008), reflecting increase in prices of food articles, especially rice, wheat, fruits and milk, and nonfood articles such as oilseeds and raw cotton. Fuel group inflation increased to 16.9 per cent on July 12, 2008 from 6.8 per cent at end-March 2008 (and a decline of 1.4 per cent a year ago), mainly reflecting the effect of some hikes in the prices of petrol, diesel and LPG in June 2008 as well as continued increase (15-51 per cent) in the prices of freely priced petroleum products such as naphtha, furnace oil, aviation turbine fuel, bitumen and lubricants over end-March 2008. Manufactured products inflation, year-on-year, rose further to 10.7 per cent on July 12, 2008 from 7.3 per cent at end-March 2008 (and 4.8 per cent a year ago), reflecting increase in the prices of edible oils, oil cakes, textiles, chemicals, basic metals, alloys and products, and machinery and machine tools. Prices of sugar and grain mill products, however, eased somewhat from end-March 2008. Consumer price inflation increased further during the first quarter of 2008-09 mainly due to increase in food prices and services (represented by the ‘miscellaneous’ group) prices. Various measures of consumer price inflation were placed in the range of 6.8-8.8 per cent during May/June 2008 as compared with 6.0-7.9 per cent in March 2008 and 5.7-7.8 per cent in June 2007.
commodity price rises worldwide, the opposite is happening. According to the 2008 Economic Survey Report, India’s inflation rate was targeted by the Reserve Bank of India (RBI) to be 4.1%, down from a rate of 5.77% in 2007. Inflation rates for many investment goods have decreased dramatically in recent years. The price of basic goods such as lentils, vegetables, fruits and poultry were expected to slow their rise. The price of various manufactured goods also fell in 2007, and this contributed to a reduced inflation rate
However, the beginning of 2008 has seen a dramatic rise in the price of rice and other basic food stuffs. There has also been a no-less alarming rise in the price of oil and gas. When coupled with rises in the price of the majority of commodities, higher inflation was the only likely outcome. Indeed, by July 2008, the key Indian Inflation Rate, the Wholesale Price Index, has risen above 11%, its highest rate in 13 years. This is more than 6% higher than a year earlier and almost three times the RBI’s target of 4.1%. Inflation has climbed steadily during the year, reaching 8.75% at the end of May. There was an alarming increase in June, when the figure jumped to 11%. This was driven in part by a reduction in government fuel subsidies, which have lifted gasoline prices by an average 10%. The Indian method for calculating inflation, the Wholesale Price Index, is different to the rest of world. Each week, the wholesale price of a set of 435 goods is calculated by the Indian Government. Since these are wholesale prices, the actual prices paid by consumers are far higher.
In times of rising inflation this also means that cost of living increases are much higher for the populace. Cooking gas prices, for example, have increased by around 20% in 2008.
With most of India’s vast population living close to – or below – the poverty line, inflation acts as a ‘Poor Man’s Tax’. This effect is amplified when food prices rise, since food represents more than half of the expenditure of this group.
