Inflation at 10.68%; policymakers between devil & deep blue sea

New Delhi, Oct 30 (UNI) Inflation seems to be tapering off with headline inflation rate being 10.68 per cent for the week ended
October 18 as against 11.07 per cent in the previous week, but the queer situation of the need to expand liquidity to spur growth and contract money supply to control prices has given policymakers more than what they can chew.
All the three major groups, namely primary articles; fuel, power, light & lubricants; and manufactured products showed a downward trend, triggering hope that the worst may be over.
'Primary Articles' declined by 0.3 per cent, the Fuel group moved down by 0.4 per cent and Manufactured Products, which have a weight of 64 per cent in the WPI, moved downwards by 0.1 per cent.
A Finance Ministry statement on inflation data noted that the Wholesale Price Index(WPI) has been declining now for five consecutive weeks.
Significantly, the inflation rate fell below 11 per cent for the first time since May.
The official statement noted that inflation in the same period in the previous year at 3.11 per cent, however, was significantly lower.
The implication of this is that high inflation rate is not a result of rapidly rising prices, but a consequence of being pegged on a low base.
In the 'Primary Articles' group, the annual point-to-point inflation declined to 10.92 per cent, as compared to 11.53 per cent last week.
Out of a total of 98 articles, 15 articles have shown a decline in prices in the current week as compared to October 11,
2008. These include wheat, arhar, urad, moong, raw cotton, raw rubber, potatoes, groundnut seed, papaya, sapota, banana, apples, cashew nuts and corriander.
Another 60 articles have shown no increase in prices.
In the case of 'Manufactured Products', rate of inflation in the current week declined to 9.26 per cent, as compared to 9.53 per cent in the previous week.
Out of 318 commodities in this group, a large number, 293 in all, have shown no increase in prices over the last week.
In the case of 18 commodities, the Finance Ministry said, there has been a decline in prices. These include rice bran, groundnut, gingelly and imported edible oils; lead, zinc and zinc ingots; deoiled and groundnut cake; basic and foundry pig iron; PTA; PVC resins, benzene, texturised yarn; and some steel products.
Only seven products, particularly sugar, khandsari and gur; hessian cloth and bags; building bricks; and bidi witnessed an increase in prices.
The primary reason why prices are falling, especially in the category of Manufactures, is the wanning consumer demand, economists say.
Commenting on inflation figures, Planning Commission Deputy Chairman Montek Singh Ahluwalia said in Bangalore that inflation rate was no longer a matter of serious concern as it was two months back, facilitated by favourable international developments.
He attributed the lower price level to the host of policy initiatives the government has taken of late.
Commodity and crude prices have been falling in the global markets, having a soothing effect on the India's price level. The bigger than expected decline in inflation rate has generated hope that the Reserve Bank of India (RBI) will reduce interest rates further to improve lending operations.
This is further butteressed by the fact that the United States FED Reserve cut its main policy rate by one per cent yesterday to stave off the credit crunch.
Other countries have been following suite, with China, Taiwan and Hong Kong cutting interest rates and there was speculation that
Japan could follow soon. It is like the old rhyme that if winter has come can spring be far behind.
It, however, needs to be noted that the RBI expects inflation to be around seven per cent by the end of the current fiscal.
Nevertheless, to do so it would require further tightening of liquidity.
But, RBI Governor D Subbarao recently switched focus to support economic growth than control inflation by lowering the repo rate and bring down the CRR by a hefty 2.5 percentage points to ward off any negative fallout on the Indian economy of an impending global recession.
The world now in the grip of the American financial crisis syndrome has been lowering interest rates. After a long time it is now co-ordinated action on the part of Central Banks. Such a situation is perhaps unprecedented in recent history.
India is, thus, in a 'Catch 22' situation faced with the need for monetary expansion to spur growth, tighten liquidity to control prices, a falling and volatile stock market and a crisis of confidence of the business community.
Economic theory has little to offer any recipe for such a complex situation.
The falling slump in global commodities and crude prices has little to do with the actions of the Indian government, just as the rising commodity prices and crude prices sometimes back had little to do with its making.
The situation is thus akin to that of Indian agriculture, which continues to be dependent on the weather Gods. Indian economy is, thus, dependent on the mercies of the international markets, which will decide whether the country would be out of the inflation or the global liquidity crunch. The government only has some room for manoeuverability