Finally, inflation below 5 percent

By Dr Suvrokamal Dutta

Good news for India, inflation fell below the psychologically worrisome 5 per cent for the first time in 10 months. According to experts, this will provide the Indian government higher fiscal and monetary maneuverability to sustain India’s high growth rate.

It is worth mentioning in this regard that inflation based on wholesale prices fell to 4.85 for the week ended May 26, and the latest price data came barely a week after India galloped into the league of high- growth economies with the gross domestic product (GDP) swelling 9.4 per cent in 2006-07. Inflation was 5.06 in the previous week.

“The fall in inflation, driven by cheaper food prices, might take the pressure off the Reserve Bank of India to execute further monetary tightening to control the runaway price line,” pointed out Pooran Singh, noted economist based at India.

The pivotal factor here is that in its slack season credit policy in April, the Reserve Bank of India had pegged the average annual inflation rate for 2007-08 at 5 per cent and said it would be in the range of 4.0-4.5 per cent over the medium term. There is no doubt that with a series of interest rates hikes in quick succession the Reserve Bank of India has aggressively tightened the monetary screws.

It has come into the notice of The India Street that while the government has cut duties on number of products, including cement and edible oils, the Reserve Bank of India has hiked the cash reserve ratio (CRR) and the repo rate to contain inflation.

“The decline in food prices was significant, with prices of fruits dropping 2.8 per cent. Vegetables also became cheaper by 1.1 per cent, and prices of pulses fell by 0.8 per cent. The arrival of the first few consignments of imported pulses might have eased prices,” pointed out a government official in the finance ministry.

Furthermore, Indian government had decided to import 1.5 million tonnes through public sector trading agencies and 115,000 tonnes have arrived on Indian shores.

While inflation rate is expected to hover around 4.85% level for the next few weeks because of the high base in the corresponding period last year, economists believe that the monsoon and international oil prices held the key to a further decrease.

"A bad monsoon could put pressure on food stocks and prices. It is very important that the rains are good and the crop is healthy," pointed out PV Kamath, business journalist based at India.