The inflation monster stirs

RBI’S tight monetary policy may have reined in inflation, it was at 3.79 per cent for the week ended January 5, 2008—but the government is worried that it may rear its head again. The Prime Minister’s Economic Advisory Council has warned that inflation will be the biggest challenge for RBI and the government in 2008.

So, what are the areas of concern on the inflation front? Crude oil prices continue to be a source of worry for the Indian government. At the time of going to press, there was talk of an imminent increase in the retail prices of fuel. Says Shubhada Rao, Chief Economist, YES Bank: “Given the under-recoveries of the oil companies, a hike is imminent.”

The Economic Advisory Council says that headline wholesale price index (WPI) inflation will cross 4 per cent if the government raises petroleum prices. Then, there are concerns on food prices. Points out Ajit Ranade, Chief Economist, A.V. Birla Group: “Foodgrains production is not keeping pace with the rising demand.” Adds Rajiv Kumar, Director & Chief Executive, ICRIER: “High food prices lead to an increase in labour wages and stoke inflationary pressures in the economy.” Thus, keeping inflation on a tight leash will remain the top priority for the government and RBI in 2008.

—Rishi Joshi