VIEWPOINT
because of sudden escalation in crude oil
Infuriating inflation
Joydeep Bhattacharjee
When the Congress president Mrs Sonia
Gandhi addressed her party leaders this
month end, she made no bones about the
impending danger that her government
at the centre cannot escape and hence her
words of wisdom indicates an early poll
that may follow either because of India’s
nuke deal with the US or the price rise or
inflation.
While nuke deal has been a matter of
disagreement over ideology and principle,
inflation is the one that concerns every indi-
vidual the fallout of which could be an early
poll or rather the fall of the government.
India has been struggling with stag-
gering inflation that touched 11.42 per cent
during this month – the highest in 13 years
and the Congress-led UPA government had
to negotiate with the current trend world
over with a semi-balancing act to tackle
the mounting pressure from within.
Inflation in India is calculated on the
basis of Wholesale Price Index (WPI)
unlike other developed countries, where
Consumer Price Index (CPI) offers the
12 July 08
As a matter of fact, though surpris-
platform for calculating inflation rate.
Why an Indian suffers the most when
inflation increases is the reason that the
wholesale prices of commodities grow
– let aside the retail price. But in case of
CPI, consumers in any of those developed
countries suffer as much as the inflation
indicates.
It is hence not surprising that infla-
tion is an issue in India, which even the
International Monitory Fund recongnises,
considering its amount of impact on day-
to-day life. Kalpana Kochhar, senior advi-
sor in the Asia and Pacific department of
the IMF, recently said, “It’s mainly due to
food, fuel, and some due to metals.”
“The other thing is, activity has come
off a very fast pace, but it is still pretty
strong. So, there is a real question about
dealing with inflation, even though it
seems to be mostly supply driven, before
it becomes entrenched in expectations,
and spills over into the second-round ef-
fects that are starting to kick in a number
of countries, reflecting the fact that do-
mestic demand has been still pretty strong
in many countries, and we are seeing that
core inflation is starting to pick up, quite
significantly in fact in a number of coun-
tries such as Indonesia, India, and Viet-
nam, and others too.”
As per IMF’s understanding, growth
in countries like India in the Asian region,
are starting to slow and inflation is rising
significantly. This increase initially reflect-
ed spikes in food and commodity prices,
and those pushed up headline inflation
numbers, and that is something that is like-
ly to be bolstered by the recent increases in
rice prices that reached 10-year highs.
That is inflation as per its theory is
concerned. But at the ground level, the in-
flation is India has grown to 13 years high
prices that propels the WPI in India.
In fact, soaring oil prices and connect-
ed inflation across the globe has become
a cause of worry not only for the devel-
oping countries like India or other Asian
countries, where slightest level of infla-
tion causes a huge repercussion, but also
for developed countries like the US where
market behaves so unpredictably due to a
steep fall in the international value of the
dollar that it resembles a Mexican Wave in
a sports stadium.
It is especially the reason why before
the OPEC (Oil Producing and Exporting
Countries) summit, British Prime Minister
Gordon Brown visited Saudi Arabia to ex-
press his desire for the price of oil to fall
after the global summit that discussed the
current worldwide crisis.
Gordon Brown addressed the leaders
of 27 major oil-producing countries who
were meeting in the wake of the cost of a
barrel of crude oil reaching $140 - twice
the level of a year ago.
Mr Brown said that there had been ac-
ceptance for the first time that record prices
were causing damage and investment was
needed to increase supply and hence want-
ed higher oil production by these countries
to meet the global demand.
But the OPEC declined to increase
the level of production immediately. Saudi
Arabia’s Oil Minister Ali al-Nuaimi said
there was enough crude oil to last for many
decades to come - but there would be no
immediate boost to oil production.
Saudi Arabia’s King Abdullah called
an international summit of world oil minis-
ters in Jeddah to find
ways of stabilising
the world oil price
when there were
high hopes among
consumer nations
that he would an-
nounce a boost in
production.
VIEWPOINT
ing enough, oil rich countries like Saudi
Arabia, Iran, Iraq, Kuwait and others, are
also faced with similar inflationary situa-
tion because of the rise in prices of food
and other commodities that they need to
import.
In absolute economic terms, inflation
is “everywhere every moment” whether in
India or in the Gulf or the US – a unique
and constant monitory phenomenon. To
counter this, India and similar other na-
tions have to depend on OPEC’s decision
to raise the production rate – a request that
has already been denied with the highest
level of courtesy.
So what can India do now?
India understands well that if the
growth rate in the domestic sectors could
be maintained if not enhanced despite all
odds, the inflation can be tackled to a great
extent. Faster inflation, fuelled by surging
food and energy prices, may slow the pace
of growth in emerging economies, which
India has to now take care of. But India’s
central bank expects growth to slow to 8.5
percent in the current fiscal year from 9
percent in the previous 12-month period
and there it fails to do anything about ris-
ing prices.
Politically, the Congress is caught be-
tween the devil and the deep blue sea. If on
one hand the Left allies are raising pres-
sure on abandoning the nuke deal with the
US, on the other inflation is going against
the party and it is not unlikely that the Left
would take advantage of the inflationary
situation and live up to its principle against
the Indo-US nuke deal.
July 08 13