Being in the dismal profession, let
me start 2011 with some grumpy news. India might
have moved on to a higher inflationary path — one
that could stay with us longer than we think.
First, the data. The chart plots inflation of the
Wholesale Price Index (WPI) for all products and
primary commodities. Let’s start with the latter,
which accounts for a fifth of the weight in the WPI
and has considerable bearing on daily expenses. For
39 of the 56 months between April 2006 and November
2010, WPI inflation of primary commodities has been
ruling at 9 per cent or more. For 31 of these
months, it has been at double-digits. For 20 months,
it has been at 12 per cent or more. And there have
been six months where it has crossed 20 per cent. In
November 2010, it was at 13 per cent — lower than
earlier, but still too high for political comfort. I
suspect that when the data comes out, onion prices
will jack this up for December 2010.
Now consider articles of food, which comprise 14 per
cent weight in the WPI, or about 70 per cent of the
value of primary commodities. From June 2009 to
October 2010 it has persistently remained in
double-digits, rising to over 20 per cent for six
consecutive months between December 2009 and June
2010. For first six months of 2010, it was over 20
per cent; and has remained above 14 per cent for the
first 10. These are frightening numbers.
Overall WPI inflation is also too high. Although a
bit lower in November 2009, it was still ruling at
7.5 per cent. More significantly, five of the eleven
months of 2010 saw it at double digits — something
that we last witnessed between June and October of
Why could we see higher inflation over a longer
period of time? It has to do with ancient, creaking
supply facing vibrant demand. Let me explain. The
size of the urban middle class, howsoever defined,
is growing at double-digits, and will continue doing
so until the scale effect comes into play. Not only
is this class growing in size, but it is also
increasing its per capita disposable income — also
at double-digits. Thus, there is a huge, and
growing, domestic demand pull for goods and services
which India had never seen in the past. It is not
just urban India. There is no denying that incomes
are rising, more for some, and less for others.
Demand is growing like never before.
Supply isn’t — at least anywhere near that pace.
Agricultural productivity pathetic; the supply chain
is mired in the late 19th century; and wastage is
beyond belief. Nothing has been done in the last
decade to raise farm productivity, improve transport
and storage, reduce the layers of needless
intermediaries and effectively improve food supply.
Our food manufacturing sector is equally poor.
Please visit rice husking plants, oil mills and
sugar factories and you will know what I mean. And
the politics of farmer protection translates to
idiosyncratic — often knee jerk — policies regarding
In such a milieu, I can’t see how won’t face higher
inflation than earlier. It will be driven by food,
followed by some elements of manufacturing. The
standard economic response will be the RBI raising
interest rates in an attempt to choke off burgeoning
demand. And the political response will be hartals,
rasta roko, storming the well of the House and, if
the timing is such, incumbents losing state
Don’t believe those who claim that India can live
with 8 per cent WPI inflation over long periods and
continue to generate 8-9 per cent real GDP growth.
It doesn’t, and won’t, happen. There lies the risk.
Of high inflation closing the taps, and choking off
Published: Business World, January 2011