India Dispatch: India has had the greatest rise in prices of the Brics nations. One expert says things will be better by March but no one is expecting any dramatic reversal.
Living with the misery of inflation
Ajitha Sudhir Gopal, who works at a law firm in Mumbai and lives in the city's suburbs, is struggling to cope with a sharp rise in the price of her weekly shop.
"I used to spend 1,500 rupees [Dh112] for monthly groceries a few months ago, but I now end up spending almost double or more for similar or smaller purchases," says Mrs Gopal, who contributes to her husband's income to run a family that includes elderly parents and two children. "It is getting more and more difficult to maintain our lifestyle."
The soaring prices of vegetables, fruits, milk, pulses and transport is hitting middle-class households hard and with subdued wage growth it is unlikely to change soon. Family budgets were squeezed as prices of vegetables shot up by 17.4 per cent and fruits became dearer by 23 per cent this month compared with September last year.
The family used to go to a film occasionally but such an activity is now considered an extravagance.
Runaway increases in the price of essential commodities and frequent rises in fuel prices since January has upset Indian household budgets. Millions of people are having to keep household expenditures under check.
"It is becoming unbearable. Apart from groceries, house rents, school fees, transport fares - everything is going up," Mrs Gopal says. "Why is the government not acting to put an end to this misery."
In India, there are several price gauges - many consumer price indexes and a wholesale price index (WPI). Policymakers consider all the price indexes but changes in the WPI are taken as the headline inflation for policy articulation.
Accelerating inflation is troubling Indian policymakers. The inflationary spiral last month hit its highest level - close to double digits - in 13 months.
Inflation has been worrying most central bankers worldwide, particularly in Asia, while those in developed markets are focusing on growth.
The Reserve Bank of India's move this month extended its record interest-rate increases to curb liquidity after inflation quickened to 9.78 per cent last month. The step was in contrast with the strategies of fellow so-called Brics nations - Brazil, Russia, China and South Africa - that have either cut borrowing costs or kept them on hold to protect their economies from the spectre of slow growth in Europe and the potential recession in the US.
Food inflation is a major concern.
As per data released by the government, prices of pulses fell by 2.45 per cent year-on-year, while wheat became cheaper by 2.03 per cent during the week that ended September 3. However, other food items have become more expensive during the week.
The price of onions increased by nearly 43 per cent on an annual basis, while potato prices were up 21 per cent. Furthermore, fruits became 22.6 per cent more expensive and overall, prices of vegetables soared 17.4 per cent. In addition, milk became 10 per cent costlier, while the rates for cereals rose 5.02 per cent.
The spiral in food prices, and often vague and short-sighted policy responses by the government, is threatening to dump many rural and lower urban households back below the poverty line.
Most policymakers in India believe inflation will remain close to 10 per cent until the end of the year. Increase in fuel prices, distorted food supply mechanism, lack or willingness to curb speculative tendencies, the depreciating rupee and forthcoming festival demand looks likely to keep inflation on the higher side in the months ahead.
Subir Gokarn, the deputy governor of the Reserve Bank of India, was quoted as saying that the central bank expected inflation to remain close to 10 per cent until November. Mr Gokarn, a senior economic adviser to the prime minister Manmohan Singh, also indicated inflation would slow only early next year.
Inflation is likely to remain at a high level for the next three or four months, said CRangarajan, the chairman of the prime minister's economic advisory council at a seminar in the southern city of Hyderabad.
He expected inflation to gradually slow to about 7 per cent by March.
"In the short run inflation hurts growth as interest rates are raised to curb demand", said DK Joshi, the chief economist at Crisil, India's leading credit rating agency. "If high inflation persists for a long time, it can jeopardise the long-term growth potential as well."
India is making all-out efforts to control the inflationary pressures to sustain economic growth.
The economy expanded 7.7 per cent for the quarter ended June 30, from a year earlier. The growth was the lowest in six quarters and well below the 8.5 per cent of the previous fiscal year that ended in March.
Industrial production growth fell to 3.3 per cent in July, the weakest pace for nearly two years.
"We do see signs of growth moderating but they are not dramatic," Mr Gokarn was quoted as saying in a Reuters report. "Looking at tax, credit growth and the analysis of corporate performance, none of these suggest a very dramatic slowdown," he said.
With fears of recession deepening in both Europe and America, businesses are already bracing for the impact. According to a report by the UN Industrial Development Organization (Unido) on trends in global manufacturing, growth in India slowed in the second quarter of this year. "A slowdown of India's manufacturing growth seems to be related to successive increases in interest rates to combat inflation and a decline in business confidence," the report said.
A survey conducted on 324 manufacturing units by the Federation of Indian Chambers of Commerce and Industry also showed an overall slowdown in the business sentiment in the second quarter.
In the areas of investments, capacity utilisation and employment have shown a declining trend, the survey showed.
The slowdown is felt in more and more sectors. The car industry is one example. Sales last month registered a lower growth rate of 11.8 per cent, compared with August last year, according to the Society of Indian Automobile Manufacturers.
It is a similar story in the clothing industry. Manufacturers have slowed production substantially because of fears of low demand, particularly from international markets. Manufacturers say international orders have declined substantially over the past few weeks.
In the retail sector, the recent discount sales by many retail stores in Mumbai, India's commercial capital, did not get much response from customers despite malls becoming increasingly common in large Indian cities. Malls are growing as the sector benefits from rising wealth, industry deregulation and a much greater openness to international influences.
Packaged consumer goods take up about a tenth of the total expenses of urban households. Many consumer product companies are cutting back on new product launches as they are reluctant to pass on cost increases to consumers.
Some companies, particularly in the food sector, have started reducing the quantity while maintaining price levels.
Inflation in India is the highest among the Brics nations.
Officials from China to South Korea have refrained from raising rates in recent weeks to gauge whether slowing economic growth will dissipate price pressures.
In Brazil, the central bank opted to cut its target Selic rate on August 31 for the first time since 2009 to protect expansion. Policymakers in Russia, which does not target one rate, reduced the rate charged on repurchase loans and raised the deposit rate this month to bolster the amount of cash in the market and to spur growth.