Average CPI during July-September, 2005 was higher by 8.64 percent compared to the corresponding period last year, while SPI was up by 7.36 percent. Last year, these indices had recorded increases of 9.19 percent and 14.02 percent respectively.
Average Wholesale Price Index (WPI), however, registered a larger increase of 10.98 percent as compared to 8.71 percent last year. Similar were the trends in prices when compared on a month to month basis. While WPI recorded a higher increase than last year, the rise in SPI and CPI in September 2005 over September 2004, though quite substantial, was lower than last year.
A closer examination of the price data reveals at least two worrisome trends. Firstly, since wholesale prices have a somewhat delayed effect on prices at the retail level, a substantially higher increase in WPI is a precursor that CPI and SPI which are really relevant for the common people are also going to register sharper increases in the coming months.
Secondly, the prices of food items, housing and transport have risen significantly and this is bound to affect the poor and middle classes disproportionately.
Another disturbing aspect is that price pressures are not expected to ease in the near future. A substantial increase in the domestic oil prices with effect from 1st October 2005 is yet to show its impact on inflation. It is quite apparent that the effect will not only remain confined to transportation and energy sectors but would percolate throughout the economy.
Further increases in international oil prices may force the government to again revise the domestic prices upwards with similar consequences. Besides, there are certain indigenous factors which may accentuate price pressures in the economy. There are now clear indications that the GDP growth this year would be lower than the target of 7 percent.
This will result in lower availability in the economy. There is also a strong possibility that a larger part of supplies than before has to be diverted to the quake affected areas to meet the needs of those regions. Whether the government would be able to meet the budgetary targets set at the beginning of the year is a big question mark because of the extra expenditures required for rehabilitation and reconstruction.
Also, monetary overhang of the past few years is yet to be fully absorbed by the economy. All these factors suggest that it may not be possible for the government to meet the inflation target of 8 percent envisaged for 2005-06.
The emerging inflation scenario is disturbing for a number of reasons. It is a kind of regressive tax that affects more adversely the poorer rather than richer sections of society and, therefore, is highly inequitable.
The rate of inflation beyond a certain level undermines the growth prospects of the economy and the present rate, if it continues over a longer term, could act as a deterrent to the revival of the economy.
A decline in growth rate in that case would also be inimical for employment generation and poverty alleviation. Besides, the external sector of the country that is already under strain will come under increased pressure due to higher inflation.
It is quite apparent that policy makers have to think seriously and aim at containing inflation at a reasonable level of, say, 5 percent or so. Though this may not be possible this year, the goal is very clear. The Asian Development Bank has recently suggested in its Outlook to further tighten monetary policy and open up imports of wheat and other essential items to dampen inflationary pressures in FY2006.
It also needs to be ensured that the requirements of the earthquake regions are mostly met through assistance and grants from foreign resources or from mobilising more domestic resources in order to avoid deficit financing to the maximum extent possible. It does not mean that we are suggesting provision of inadequate resources for the affected people and regions but only advocating the need of good housekeeping.
Although exogenous factors like international prices are outside the control of the government, a good combination of these measures could help contain the rate of inflation at a reasonable level.