Home »  Magazine »  Business  »  The False Bottom

The False Bottom

Is the 4.7 per cent inflation an outcome of jugglery with figures?

The False Bottom
outlookindia.com
-0001-11-30T00:00:00+0553
IT'S a conundrum that is fooling no one. In one year, inflation—as per the Finance Ministry—has nose dived from ahigh of 17 per cent to 4.7 per cent, a drop of over 70 per cent. And strangely enough, no one is impressed. Says a vegetable-seller in Dadar, Bombay: "When prices rise, the only thing which loses value is the rupee. These figures you are talking about are reflected only in the value of the rupee which indeed has fallen dramatically."

That is a straight-off-the-street insight for Government pundits who religiously release the inflation figures every week. Says Kirit Parikh, director, Indira Gandhi Institute of Developmental Research: "Inflation at this level is stage-managed with the specific purpose of fighting the elections. The Government has postponed many of its decisions on the price front."

Of course, the Government is not cooking up the figures, says Mahesh Vyas, /economist at the Centre for Monitoring Indian Economy. "It's a convenient management of figures that has brought the inflation to such a low," he says. According to Vyas, apart from the fact that the inflation rate is linked to the wholesale price index (WPI) and not to the consumer price index, which is more reflective of the real price rise, it is the selection of the basket of goods that has resulted in such a skewed rate.

The WPI has three components: primary articles; fuel, power and lubricants; and manufactured products. While the weightage awarded to primary articles is 32.29 per cent, fuel, power and lubricants get 10.66 per cent weightage, while manufactured products command a maximum weight of 57.04 per cent. "However, the tragedy is that often the WPI and hence inflation is calculated on figures available for only 27 per cent of the basket that consists of almost 80items," says an Industry Ministry source. (The WPI is compiled by the Ministry of Industry, while the inflation figures are released by the Finance Ministry.)

 In the current fiscal year, the Government has not raised administered prices of a range of items from petroleum products to rice, wheat, fertilisers and sugar. While the overall WPI went up by 9 per cent during the period, wholesale prices of manufactured items increased by 8 per cent, primary articles by 6 per cent, and fuel prices went up by only 1 per cent. Says Vyas: "The current inflation slide in the country is mainly due to the supply side economics—administered prices being low, edible oils on Open General Licence, and good monsoons resulting in more foodgrains entering the market."

 But, explains Vyas: "So while raw material prices are down, the finished goods prices have shown an increase." For instance, raw cotton prices, controlled mainly by the Government, have come down, but the prices of fabric have increased. "Between December 1994 and December 1995, fibre prices (including cotton, jute, etc.) declined by 3.4 per cent while consumer articles showed an increase of over 17 per cent," says Vyas.

"In addition," he says, "the weighting pattern of the WPI is far too old. The index has different weights for levy cement and non-levy cement. The weightage attached to levy sugar and non-levy sugar also is far outdated." These archaic parameters apart, it is also clear that the Government is hell-bent on keeping inflation low as it has the ensuing elections in mind. The decision to decontrol petroleum and petroleum products and coal prices was taken over a year ago, but has not yet been implemented. Meanwhile, with the rupee tumbling by over 15 per cent against the dollar, the Government's oil pool account is in the red by almost Rs 2,000 crore. Yet petroleum prices have been kept obdurately constant.

The RBI has also been co-opted into the war against inflation by tightening the money supply. Compared to last year's figures of almost 13 per cent, money supply this year stopped just under 6 per cent. This has been a weapon that has struck both ways. Raw material prices have ruled steady because nearly the same amount of money is chasing nearly the same amount of goods as last year. But the squeeze on money has sent interest rates soaring. Result: industry has to pay higher to borrow money, leading to a rise in retail prices. Inflation, based on consumer prices for the industrial worker, continues to rule at around 10 per cent, more than double of inflation based on wholesale prices. And that is what affects the common man.

"The only problem with this low inflation is that it may boomerang on the government, especially with the urban voters who may get upset with the contradiction between the low rates and high consumer prices," says Dr Sree Kamal Sen, advisor (planning and research), Exim Bank of India. Ominous last words? 

Subscribe to Outlook’s Newsletter

READ MORE IN:
Next Story : Operation Clean-up
Download the Outlook ​Magazines App. Six magazines, wherever you go! Play Store and App Store
THE LATEST ISSUE
CLICK IMAGE FOR CONTENTS
  • PHOTO
  • NEWS
  • BLOGS
  • LATEST
Online Casino Betway Banner



Advertisement

OUTLOOK TOPICS :

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z 0 1 2 3 4 5 6 7 8 9

or just type initial letters