India’s inflation at seven-year high of 8.75 percent (Lead)

June 13th, 2008 - 3:09 pm ICT by IANS  

A file-photo of Manmohan Singh

New Delhi, June 13 (IANS) In what is more bad news for the hard-hit ordinary citizen, industry and policy makers alike, India’s annual inflation rate shot up to a seven-year high of 8.75 percent for the week ended May 31, against 8.24 percent for the week before. The rate - which has been inching closer towards the double digit level - had last touched a higher figure of 8.77 percent for the week ended Feb 10, 2001.

The current sharp rise in inflation rate was due to higher prices of both food articles like eggs, lentils, fruits, vegetables and meat, as well as manufactured goods like edible oils, official data on wholesale price index showed Friday.

Alarmingly, the data pertained to the week before the government allowed a steep hike in prices of petroleum products and its impact was yet to reflect on the index. Experts feel the fuel price hike would push the inflation rate by another 80 basis points.

Equally worrisome was the final data for week ended April 5, which said the annual inflation rate was actually 7.71 percent and not 7.14 percent as reported earlier, based on provisional data.

“The higher inflation rate was expected. It will certainly cross the nine-percent mark next week due to the hike in fuel prices,” said D.K. Joshi, chief economist of rating agency Credit Rating Information and Services Ltd.

“The inflation will remain in this uncomfortable range for the next few months. It will shoot up further if oil prices continue to rise as the way it has over the past year,” Joshi told IANS.

The wholesale price data comes against the backdrop of India’s central bank hiking its short-term lending rate by 25 basis points Wednesday to tighten money supply and curb inflationary expectations.

The spurt of almost 50 basis points in the inflation rate now could trigger a further tightening of the monetary policy, as indicated in the Reserve Bank of India’s (RBI) statement after the rate hike.

“Monetary policy has to respond pro-actively to immediate concerns,” the RBI said.

“At the same time, it is critical at this juncture to demonstrate, on continuing basis, a determination to act decisively, effectively and swiftly to curb any signs of adverse developments in regard to inflation expectations.”

Ratings agency Moody’s also predicts that India’s central bank may hike interest rates, even as it predicts an economic slowdown for an economy that has sustained a growth of nine percent or more for three successive years.

“Amid tight monetary policy conditions which weigh on household consumption and business investment, the Indian economy looks set to slow this year,” Moody’s Economy said in a report Thursday.

“The biggest challenge facing central banks across Asia is to cool inflation without hurting economic growth. The RBI is no exception,” said the agency’s report, prepared by its economist Sherman Chan based in Sydney.

For the Indian industry, a high inflation rate comes against the backdrop of industrial production growth slowing to seven percent for April against 11.3 percent for the like month last year.

Data on the Index of Industrial Production (IIP) released Thursday showed that the growth of the manufacturing sector, that has the maximum weight in the index, was just 7.5 percent in April, against 12.4 percent in the like month of last fiscal.

The unrelenting rise in prices and the steep hike in prices of petroleum fuels also prompted Prime Minister Manmohan Singh to write to all ministers last week, urging austerity, besides asking state governments to help by lowering taxes on fuel.

“As we ask people to bear some of the financial burden of our oil imports, it is not only necessary from resource conservation point of view but also as a moral duty to cut all wasteful expenditure in our own establishments,” he said in the letter.

“While instructions will be issued to the cabinet secretary to introduce more rigorous scrutiny of foreign travel proposals, best prudence can be exercised at your own level with regard to both foreign and local travel for you and your officers.”

But these steps have not managed to cool the angst of Left parties and the opposition, which blame the ruling United Progressive Alliance (UPA) for the current situation and say that it will be a major plank in the next general elections.

“The UPA government has in a way signed its own death warrant with this petroleum price hike,” said Bharatiya Janata Party (BJP) leader L.K. Advani, now being touted as the prime minister in waiting.

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