Inflation returns, but growth may slow

Wholesale prices in India rise again and Central bank uncertain on raising rates as poor monsoon season threatens economic recovery.

Analysts have been worried about the re-emergence of inflation and the impact of a poor monsoon season in India.

NEW DELHI // India's wholesale prices rose for the first time in 14 weeks as a nascent global economic recovery pushed up the cost of commodities and manufactured goods. The benchmark wholesale price index climbed 0.12 per cent in the week to September 5 compared with the same period last year, after retreating 0.12 per cent in the previous week, the commerce ministry said yesterday.

The re-emergence of inflation comes as growth prospects slow in India, making it difficult for policy makers to decide when to raise interest rates. The Reserve Bank of India governor Duvvuri Subbarao, who predicts Asia's third-largest economy may be among the first to increase borrowing costs, said this week that the central bank would do so only upon "sure" signs of a recovery. "A pickup in inflation is a serious concern," said Sherman Chan, an economist at Moody's Economy.com in Sydney. "The authorities are keen to make pre-emptive moves in containing inflation, though we expect the Reserve Bank to only tighten policy when growth returns.

The finance minister Pranab Mukherjee expects India's economic expansion to slow this quarter and the next as a shortage of rain reduces harvests. The government is "doubtful" the 6.1 per cent pace of growth reported in the three months to June 30 will be maintained in the second and third quarters of the financial year ending next March, he said on September 7. The yield on India's 10-year benchmark bond advanced 0.08 percentage point to 7.16 per cent, the highest in a week, after the report.

The index of primary articles that includes grains and other food items gained 9.05 per cent in the week to September 5 from a year earlier, the report showed. The index of manufactured products declined 0.14 per cent. Yesterday's inflation data was along "expected" lines and there could be inflationary pressures in the months ahead, Mr Mukherjee said. On Tuesday, Mr Subbarao described the need to balance boosting growth against checking inflation as "a challenge". He forecast inflation may accelerate to more than 5.2 per cent by March 31, exceeding the central bank's 5 per cent estimate given in July.

Deficient rainfall in the four-month monsoon season that usually starts in the first week of June has created food shortages and hurt agriculture production, raising prices and delaying India's economic recovery, said Mr Chan. India's monsoon rainfall, the main source of irrigation for the nation's 235 million farmers, may be about 20 per cent less than the country's 50-year average, the India meteorological department said early this month. Insufficient rains may cause damage to commodities such as rice and sugar cane, it said.

"The impact of the drought on inflation is likely to be disproportionately larger than that on nominal income," said Abheek Barua, the chief economist at HDFC Bank. Mr Barua expects the central bank to raise policy rates by a quarter of a percentage point in April next year and increase the cash-reserve ratio by half a percentage point by March. Mr Subbarao cut interest rates six times between October last year and April to shield India's US$1.2 trillion (Dh4.4tn) economy from the worst global recession since the Great Depression.

In the last monetary policy announcement on July 28, he left the reverse-repurchase rate unchanged at 3.25 per cent and kept the repurchase rate at 4.75 per cent. Food costs as reflected in the nation's other inflation measures are already increasing. Consumer prices paid by farm workers jumped 12.9 per cent in July from a year earlier. Inflation for rural workers was 12.67 per cent and consumer prices paid by industrial workers climbed 11.89 per cent.

India has four consumer-price gauges and uses the wholesale-price index as the benchmark because the other inflation measures do not capture the aggregate price picture. India's wholesale-price index published yesterday may be revised in two months, after the government receives additional data. The ministry revised the rate for the week ended July 11 to a drop of 0.63 per cent from a decline of 1.17 per cent.

* Bloomberg