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VIEWPOINT

VIEWPOINT

Infuriating inflation Joydeep Bhattacharjee

When the Congress president Mrs Sonia Gandhi addressed her party leaders this month end, she made no bones about the impending danger that her government at the centre cannot escape and hence her words of wisdom indicates an early poll that may follow either because of India’s nuke deal with the US or the price rise or inflation. While nuke deal has been a matter of disagreement over ideology and principle, inflation is the one that concerns every individual the fallout of which could be an early poll or rather the fall of the government. India has been struggling with staggering inflation that touched 11.42 per cent during this month – the highest in 13 years and the Congress-led UPA government had to negotiate with the current trend world over with a semi-balancing act to tackle the mounting pressure from within. Inflation in India is calculated on the basis of Wholesale Price Index (WPI) unlike other developed countries, where Consumer Price Index (CPI) offers the 12

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platform for calculating inflation rate. Why an Indian suffers the most when inflation increases is the reason that the wholesale prices of commodities grow – let aside the retail price. But in case of CPI, consumers in any of those developed countries suffer as much as the inflation indicates. It is hence not surprising that inflation is an issue in India, which even the International Monitory Fund recongnises, considering its amount of impact on dayto-day life. Kalpana Kochhar, senior advisor in the Asia and Pacific department of the IMF, recently said, “It’s mainly due to food, fuel, and some due to metals.” “The other thing is, activity has come off a very fast pace, but it is still pretty strong. So, there is a real question about dealing with inflation, even though it seems to be mostly supply driven, before it becomes entrenched in expectations, and spills over into the second-round effects that are starting to kick in a number of countries, reflecting the fact that domestic demand has been still pretty strong in many countries, and we are seeing that

core inflation is starting to pick up, quite significantly in fact in a number of countries such as Indonesia, India, and Vietnam, and others too.” As per IMF’s understanding, growth in countries like India in the Asian region, are starting to slow and inflation is rising significantly. This increase initially reflected spikes in food and commodity prices, and those pushed up headline inflation numbers, and that is something that is likely to be bolstered by the recent increases in rice prices that reached 10-year highs. That is inflation as per its theory is concerned. But at the ground level, the inflation is India has grown to 13 years high

because of sudden escalation in crude oil prices that propels the WPI in India. In fact, soaring oil prices and connected inflation across the globe has become a cause of worry not only for the developing countries like India or other Asian countries, where slightest level of inflation causes a huge repercussion, but also for developed countries like the US where market behaves so unpredictably due to a steep fall in the international value of the dollar that it resembles a Mexican Wave in a sports stadium. It is especially the reason why before the OPEC (Oil Producing and Exporting Countries) summit, British Prime Minister Gordon Brown visited Saudi Arabia to express his desire for the price of oil to fall after the global summit that discussed the current worldwide crisis. Gordon Brown addressed the leaders of 27 major oil-producing countries who were meeting in the wake of the cost of a barrel of crude oil reaching $140 - twice the level of a year ago. Mr Brown said that there had been acceptance for the first time that record prices were causing damage and investment was needed to increase supply and hence wanted higher oil production by these countries to meet the global demand. But the OPEC declined to increase the level of production immediately. Saudi Arabia’s Oil Minister Ali al-Nuaimi said there was enough crude oil to last for many decades to come - but there would be no immediate boost to oil production. Saudi Arabia’s King Abdullah called an international summit of world oil ministers in Jeddah to find ways of stabilising the world oil price when there were high hopes among consumer nations that he would announce a boost in production.

As a matter of fact, though surprising enough, oil rich countries like Saudi Arabia, Iran, Iraq, Kuwait and others, are also faced with similar inflationary situation because of the rise in prices of food and other commodities that they need to import. In absolute economic terms, inflation is “everywhere every moment” whether in India or in the Gulf or the US – a unique and constant monitory phenomenon. To counter this, India and similar other nations have to depend on OPEC’s decision to raise the production rate – a request that has already been denied with the highest level of courtesy. So what can India do now? India understands well that if the growth rate in the domestic sectors could be maintained if not enhanced despite all odds, the inflation can be tackled to a great extent. Faster inflation, fuelled by surging food and energy prices, may slow the pace of growth in emerging economies, which India has to now take care of. But India’s central bank expects growth to slow to 8.5 percent in the current fiscal year from 9 percent in the previous 12-month period and there it fails to do anything about rising prices. Politically, the Congress is caught between the devil and the deep blue sea. If on one hand the Left allies are raising pressure on abandoning the nuke deal with the US, on the other inflation is going against the party and it is not unlikely that the Left would take advantage of the inflationary situation and live up to its principle against the Indo-US nuke deal.

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