Managing inflationary expectations

Inflation is now an Asian worry. The annual report of the Asian Development Bank, entitled Asian Development Outlook 2008, points out that while growth in Asia will be moderate this year, inflation management will be the single biggest challenge. Inflation will be in double digits for Central Asia and remain worrisome for the People's Republic of China, notwithstanding tighter monetary policy, higher reserve requirements in banks and an attempt to deflect growth away from exports and investments. The report observes that "the risk of an inflation spiral in Asia is palpable and warrants close attention. Indeed, actual inflation rates disguise the extent of underlining inflationary pressures due to the presence of subsidies, administrative price controls and cuts in excise duties". This is more true in India than anywhere else.

In low-income countries, inflation hurts every segment of society, but its incidence is the worst among poorer segments, both urban and rural. Within this category, the impact of food inflation is the harshest. While those who are better off adjust to keep the food consumption unchanged, the poor do not have this flexibility as the bulk of their income is anyway devoted to food consumption. In other words, the poor have to reduce food consumption, suffer nutritional deficiencies and other disabilities.

For India, the Consumer Price Index for the week ending March 29 registered a point-to-point inflation of 7.41 per cent. This masks the real impact because primary articles have only a 22 per cent weightage in the Wholesale Price Index (WPI), while manufactured articles have a 63.7 per cent weightage. The prices of fruits, vegetables, edible oil, pulses and cereals have risen far more significantly. So food inflation is considerably higher than what is reflected in the WPI and a cause of serious concern.

Our present food scenario represents a combination of at least eight factors.

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