Inflation retreats; now address growth -Editorial

The sharper-than-expected fall in inflation measured by the wholesale price index (WPI) to a nine-month low of 6.84% for the week ended December 

6 brings some much-awaited cheer to both policymakers and the public. 

While stock markets promptly rose on the news, the BSE sensex ending the day 361 points up to close above the 10,000 mark, what is encouraging is that coming weeks should see inflation fall further. First, as the follow on impact of the cut in fuel prices and later the reduction in aircraft turbine fuel prices is felt. 

Though the reduction in the price of petrol may not have much impact on wholesale prices, the reduction in diesel and ATF prices will, since transport cost is an important input in the costing of other products. Global oil prices have, in the meanwhile, continued to fall — oil is now below $40 a barrel. Hence the index for the ‘fuel, power, light and lubricants’ group, which declined 3.7% during the week due to lower prices of naphtha, furnace oil, bitumen, etc, whose prices are market-determined, is likely to fall further. 

What is even more welcome is the 0.4% decline in the index for primary articles and the 0.5% decline in the food articles group due to lower prices of some pulses, fruit and vegetables, tea and barley. To the extent food constitutes a major chunk of the consumption basket for a large and vulnerable section of the population, the decline in food prices is a happy augury. 

For a government battling bad news on the GDP and industrial production front, declining inflation gives it the much-needed elbow room to consider more stimulus measures — especially if global commodity prices continue to fall, as seem likely. In the US the consumer price index dropped to 1.1% year-on-year in November compared to 3.7% year-on-year in October. We are a long way from that. 

Nevertheless, the inflation-growth equation, so far more or less evenly balanced between growth and, now stands firmly tilted in favour of growth. More so, if the decline in WPI is also a reflection of demand contraction. There is some evidence of this from the decline (0.3%) in the index for manufactured products group at a time when growth of manufacturing output is slowing, if not falling. Clearly we have beaten some devils; but others remain.