Price trends - salutary or ominous?

By S. Swaminathan

In the midst of the worries over a perceived weakening of the growth momentum, what seemed to confront the managers of macro- economic policy till about a month ago was a worsening inflation scenario. The third quarter of 2000-01 (ending December 2000) had recorded an average rate of inflation of 7.7 per cent on a year- to-year basis measured by movements in the Wholesale Price Index (WPI). This was indeed a far cry from the average rate of 3.3 per cent for the whole of 1999-2000.

At the time when Mr. Yashwant Sinha presented the budget for 2001-02, it seemed that the year gone by would end up with an inflation rate exceeding 6.5 per cent. The Centre for Monitoring the Indian Economy, in fact, even in its March 2001 forecast, had estimated inflation at 8 per cent.

All these baleful prognostications now appear to have been exaggerated extrapolations. The price data now available for the week ended March 31, 2001 indicate that inflation based on WPI on a year-to-year basis has come down to 4.87 per cent from 6.75 per cent in the corresponding week in 2000. The impression of a dramatic reversal of inflation is, however, untenable. Over the years, price trends during the last quarter (January-March) have generally tended towards a disinflationary mode with the arrival of kharif crops in the market. In 1999-2000, for instance, the WPI increased by just 0.3 per cent during the fourth quarter while the annual increase had been of the order of 4.2 per cent in terms of ``the average of weeks.''

RBI focus on core rate

Although economic analysts, by and large, seemed to apprehend that a combination of slackening growth and accelerating inflation was about to overtake the Indian economy, the Reserve Bank of India took the stance that but for the adjustments effected in administered prices of petroleum products during the close of 1999-2000 and again in September 2000, (consequent on the three-fold rise in crude prices to around $35 a barrel in less than a year), the inflation rate had remained fairly subdued. It was true that the annual rate of inflation, on a point-to-point basis, as on December 30, 2000, stood at 8.2 per cent as compared to 3 per cent as on January 1, 2000. This was the ``headline rate'' covering all commodities. But, if ``administered items'' are excluded, said the RBI (in its Report on Currency and Finance 1999-2000), the ``core rate of inflation'' would only work out to 3.5 per cent on a point-to- point basis as of December 30, 2000.

Was this some ``statistical quibbling'' or a realistic assessment that when the full effects of adjustments in administered prices of petro-products were absorbed by the economy, the inflation rate would certainly moderate? As the data for the period subsequent to December 2000 have now unfolded, it seems evident that the RBI's optimism about the price trends during 2000-01 has been vindicated.

Finance Ministry's pre-budget assessment

Contrary to the general perception that the inflation rate during 2001-02 could ascend to a disturbing higher level, the Union Finance Ministry, in the Economic Survey 2000-01, expressed some sober confidence that ``the overall inflation in fiscal 2001-02 should be fairly moderate.''

The Ministry's reasoning has two streams. The first is that the 8.2 per cent rise in point-to-point inflation, as of January 2001, had been caused largely by the ``Fuel, power, light and lubricants'' sector as a result of the hike in administered prices. The official estimate is that 65 per cent of the price increase overall during April-January (2000-01) had been caused by this sector. As against this, inflation relating to Primary Articles (as on January 20, 2001) had been of the order of 4.2 per cent while that relating to Manufactured Products had been around 4 per cent.

The second reasoning is the fact that there are no serious supply constraints in the economy even when the anticipated decline in foodgrains production by 10 million tonnes is taken into consideration. With food stocks bursting at the seams and with forex reserves nearing the $43 billions threshold, the country can manage the price-level with a reasonable degree of stability. That the overall economic strategy of higher growth with price stability is eminently viable is the most encouraging prospect resulting out of the current assessments of price trends.

The flip side

The fact that inflation is in the process of unwinding is a good chit for the economy. For a traditionally underdeveloped economy, high costs have often operated as the barrier for progress.

If the economy can get accustomed to a regime of moderate prices (unless it is interrupted by exogenous developments such as the oil price escalation of 1999-2000) and if inflationary expectations remain subdued over a long period, the savings- investment process itself is bound to become buoyant. But all this cannot operate without agriculture and industry going through a painful process of transition to a regime of near- stability of prices.

If the recent experience is any guide, the restructuring of the price-level (owing to liberalisation, capacity additions, over- production of many agricultural commodities and import liberalisation apart from growing competition for domestic markets) cannot but involve traumatic modifications in the scale of operations, cost standards, marketing strategies and above all in the culture of productivity. There are seeming contradictions at work in the economy.

While the agricultural community (or perhaps the political groups aggressively lobbying for the farmers) appears to be highlighting the crash in prices of agricultural commodities, nobody seems to care for the vast population of artisans (handloom weavers for instance) which is facing mass joblessness.

Declining prices are quite welcome if they reveal structural improvements in the economy through improved standards of productivity and growing competition and efficiency. Would the trends be equally welcome if the driving force behind a moderation in prices is a stagnation in consumption overall or in investment or both?

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