There is both a good and a bad side to official wholesale price inflation dropping below five per cent in April for the first time in 41 months. The perceptible decline is good in so far that it creates the headroom for the Reserve Bank of India (RBI) to consider more decisive policy rate cuts, as opposed to the ‘baby step’ reductions it has been resorting to. The bad part, however, is that the fall in the headline rate had been primarily led by its ‘core’ component – the inflation number stripped of price increases in food and fuel items. Since September, ‘core’ inflation has more than halved to below 2.8 per cent. This clearly indicates low pricing power among manufacturers and can be held as proof of the success of the RBI’s anti-inflationary tight-money stance for most of the last three years.

But the problem really is in the so-called non-core component of inflation. While the annual price increase in food articles was relatively low at 6.1 per cent in April, the fact that it ruled at 12 per cent only two months earlier means we are dealing with something inherently prone to volatility. At 8.8 per cent, inflation in fuel and power is more amenable to control since the Government can always determine prices of diesel or electricity. But there are fiscal costs to this that the country can ill-afford. Volatile or high non-core inflation does two things. First, since the products that contribute to it account for a significant part of the public’s consumption basket – so much for ‘non-core’! – their prices drive inflationary expectations and, in turn, influence wage bargaining and overall labour costs. Second, in an environment in which manufacturers are unable to pass on these costs, it results in a further squeeze in margins, causing many to even shut down. This is already happening on the ground.

There aren’t many solutions to this combined problem of falling core but rising non-core inflation. To the extent that interest forms a part of manufacturers’ costs – companies are today paying 12-13 per cent for working capital – a more than marginal cut in the RBI’s policy rates may well be in order. Since core inflation is already low and given that there is not much the RBI can do about tomato or onion prices, the risks from this are likely to be minimal. The Government can, likewise, contribute by going in for modest increases in the minimum support prices for crops sown in the ensuing kharif season. That may not be easy in an election year. But if the Government and RBI do their part, and the rain gods cooperate by obliging with a well-distributed monsoon, we will have a more enduring cure to the inflation problem.

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