Govt sounds warning note on inflation

The spiralling crisis in the Middle East and rising global commodity prices could increase inflationary pressures at home, the Economic Survey on Friday warned, observing food inflation has been in double digits for 76 weeks since June 5, 2009.

"The inflationary pressures on the domestic front are likely to be exacerbated by the higher levels of global commodity prices," said the Survey tabled by Finance minister Pranab Mukherjee for 2010-11 in Parliament.

It also indicated that political turmoil in the Middle East and the "easy money" policy being followed by developed nations will have a bearing on headline inflation. Headline inflation, which peaked at around 11% in April, 2010, has been on the decline.

It was 8.23% in January. The Survey attributed the decline in inflation to the structural and macroeconomic steps taken by the government and the RBI to combat rising food prices. "This year, inflation seems to be driven by demand factors, despite higher supply levels," the Survey said.

This is in contrast to the fact that in the last fiscal, inflation was mostly driven by a deficient monsoon, leading to scarcity of certain food products like pulses, cereals and sugar.

The Survey also pointed to the IMF projections of continued pressure on commodity and non commodity prices.

The Middle East turmoil has already taken global oil prices to a two year high of over USD 100 per barrel. Headline inflation has been over 8% since February, 2010. "The ten-year average of headline WPI inflation was around 5.3% from 2000-01 to 2009-10... In the current financial year (2010-11), the average inflation (April-December) of 9.4% was also much higher than the decadal rate," the Survey said.

The government has already said that it expects inflation to moderate to around 5% by June-July. The RBI has also hiked its short-term lending and borrowing rates six times since April, 2010, to tame inflationary pressure by tightening monetary supply.