Prakash Chawla
THINGS have come to such a pass that when the Indian industry grows by just about 2.4 per cent annually, the government managers seem to be celebrating. The celebration is that the Index of Industrial Production, or IIP, went up by 1.4 percentage points more in January, 2013 than a mere one per cent in the same month last year.
What a climb-down from a situation where the industrial production and the services together would steer the country’s economic progress measured by the Gross Domestic Product( GDP). We have reached a situation where we manage to cling somehow to a positive percentage and we party. The reason- the others are worse than us!
But just when the IIP data was released on March 12, another set of numbers was released on the Consumer Price Index. Effort was made to gloss over this figure on the alibi that it is the Wholesale Price Index which is generally taken into the reckoning by the Reserve Bank of India while taking a call on the interest rates for which there is a clamour for downward movement.
The CPI for February has gone up to 10.91 per cent , worsening from January pouring cold water on the Finance Ministry’s scheme of things which were projected to rein in inflation which has remained over 8.8 per cent for the last three years even at the headline (Wholesale Price Index ) level.
We heard comments like “worst seems to be over” after the numbers were released by the department of statistics. The same set of people supported by the Finance Ministry are also clamouring for the cut in interest rates even though higher inflation has to be tolerated by the people of the country.
Suddenly, there is new pressure on the RBI to accept a high inflation number of say seven – eight per cent as the “new normal” caused by various domestic and global factors which are here to stay, that is their argument at least.
But thankfully, RBI Governor D Subbarao has destroyed each of these arguments issuing a point-by-point rebuttal in his recent speech. For the central bank, the normal inflation which can give a good balance between growth and the prices is about four-five per cent with four per cent mean number.
“Admittedly, the average inflation rate in India over the last three years has trended up. Nevertheless, the context presents neither a necessary nor a sufficient condition for the Reserve Bank to revise its inflation goal. Not a necessary condition because, as indicated earlier, much of our inflation is driven by supply constraints which can be corrected by appropriate policies and their effective implementation. Accepting a new normal for inflation not only has no theoretical or empirical support, but entails the moral hazard of policy inaction in dealing with supply constraints. Not a sufficient condition because there is no empirical evidence to establish that the benefits of higher growth outweigh the costs of welfare loss associated with higher inflation.”.
In a way, Subbarao also gave a clear signal to Finance Minister P Chidambaram that the central bank has a mind of its own and if it has to err , it will err on the side of caution. Chidambaram is getting restless with the RBI to cut rates, but Subbarao is in no hurry. He cannot ignore the CPI numbers , just because the government wants him to look at the WPI.
A look at the CPI detailing tells us how the average consumer is suffering both in rural and urban areas. If you go to subzi mandi in the neighbourhood, the vendors do not tell you the rates of a kilo or even half kg. He would tell you the rates of a “paav “(250 grams) because the kilo rates can upset you.
The trouble is that it is only the vendors who know what can upset the consumers and not the government.
The cereals are , according to government CPI, selling 17 per cent high , vegetables 22.29 per cent, oils and fats 15 per cent . Onions seem to be a little accommodative. Or is it that Rs 25-30 a kg onion is a “new normal”?
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