The following is directly reproduced from the article titled "Will inflation get worse" by Omkar Goswami in Businessworld Magazine dated 17 Jan 2011. http://www.businessworld.in/bw/2011_01_08_Will_Inflation_Get_Worse.html
Being in the dismal profession, let me start 2011 with some grumpy news. India might have moved on to a higher inflationary path — one that could stay with us longer than we think.
First, the data. The chart (‘Rising Prices?’) plots inflation of the wholesale price index (WPI) for all products and primary commodities. Let’s start with the latter, which accounts for a fifth of the weight in the WPI and has considerable bearing on daily expenses. For 39 of the 56 months between April 2006 and November 2010, WPI inflation of primary commodities has been ruling at 9 per cent or more. For 31 of these months, it has been at double-digits. For 20 months, it has been at 12 per cent or more. And there have been six months where it has crossed 20 per cent. In November 2010, it was at 13 per cent — lower than earlier, but still too high for political comfort. I suspect that when the data comes out, onion prices will jack this up for December 2010.
Now consider articles of food, which comprise 14 per cent weight in the WPI, or about 70 per cent of the value of primary commodities. From June 2009 to October 2010, it has persistently remained in double digits, rising to over 20 per cent for six consecutive months between December 2009 and June 2010. For the first six months of 2010, it was over 20 per cent; and has remained above 14 per cent for the first 10. These are frightening numbers.
Overall, WPI inflation is also too high. Although a bit lower in November 2009, it was still ruling at 7.5 per cent. More significantly, five of the 11 months of 2010 saw it at double digits — something that we last witnessed between June and October of 2008.
Why did we see higher inflation over a longer period of time? It has to do with ancient, creaking supply facing vibrant demand. Let me explain. The size of the urban middle class, howsoever defined, is growing at double-digits, and will continue doing so until the scale effect comes into play. Not only is this class growing in size, but it is also increasing its per capita disposable income — also at double-digits. Thus, there is a huge, and growing, domestic demand pull for goods and services which India had never seen in the past. It is not just urban India. There is no denying that incomes are rising, more for some, and less for others. Demand is growing like never before.
Supply isn’t — at least anywhere near that pace. Agricultural productivity is pathetic, the supply chain is mired in the late 19th century, and wastage is beyond belief. Nothing has been done in the past decade to raise farm productivity, improve transport and storage, reduce the layers of needless intermediaries and effectively improve food supply. Our food manufacturing sector is equally poor. Please visit rice husking plants, oil mills and sugar factories and you will know what I mean. And the politics of farmer protection translates to idiosyncratic — often knee jerk — policies regarding food imports.
In such a milieu, I can’t see how we won’t face higher inflation than earlier. It will be driven by food, followed by some elements of manufacturing. The standard economic response will be the Reserve Bank of India raising interest rates in an attempt to choke off burgeoning demand. And the political response will be hartals, rasta roko, storming the well of the House and, if the timing is such, incumbents losing state elections.
Don’t believe those who claim that India can live with 8 per cent WPI inflation over long periods and continue to generate 8-9 per cent real GDP growth. It doesn’t, and won’t, happen. There lies the risk — of high inflation closing the taps, and choking off growth.
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