Inflation giving India’s government jitters
Tuesday, 01 April 2008

High inflation has returned to haunt India, prompting the government to declare war on soaring prices to keep the support of the nation’s notoriously cost-sensitive voters, analysts say, reports AFP.

Inflation has zoomed to a 13-month high of 6.68 percent, doubling in just a few months, with rising food prices a key culprit, figures last week showed.

The government “is determined to take all steps... to moderate inflation and if that means we have to live with slightly lesser growth—so be it,” Finance Minister Palaniappan Chidambaram said after Friday’s data. With elections due in little over a year, the Congress coalition is wary of the pivotal role of the so-called “onion factor” in ousting governments.

Once onions and other dietary staples start getting too costly for India’s poor, politicians better watch out, so political wisdom goes. “High inflation is historically a vote-loser in India as it hits the poor very quickly while high economic growth is not necessarily a vote catcher,” said Deepak Lalwani, director at London brokerage Astaire Securities.

The economy has grown by an average nearly nine percent for the last three years and “it takes a long time to ‘trickle down’ to the poor rural masses who account for nearly 65 percent” of the 1.2 billion population, Lalwani said.

The finance minister blames inflation on a “relentless increase” in global crude oil, commodity and foodgrain prices and says India must strive for maximum self-sufficiency to avoid “importing inflation.”

“Prices are going up all the time. We buy the essentials but can’t afford anything special,” said Savitry Chowdhary, 41, whose husband works as a government clerk and who has two hungry teenagers.

Until late last year, everything was looking rosy with growth barrelling along and inflation well inside the central bank’s comfort zone of five percent. But now India now is facing the worst of all scenarios with rising prices, slowing growth and interest rates already at six- year highs.

“The (inflation) hydra is back. The spike in inflation removes nearly all possibility of a rate cut” to stimulate the economy, Goldman Sachs economist Tushar Poddar said.

Chidambaram sees growth slowing to 8.8 percent in the 2007- 08 fiscal year from 9.6 percent last year—the first deceleration in three years as a result of aggressive monetary tightening to keep inflation in check. Economists see a further downturn next year. JP Morgan economist Rajeev Malik has just revised his growth forecast to 7.0 percent from 7.5 percent for 2008-09.

The government now is fixed on battling inflation “given the huge political sensitivity to rising prices,” said HSBC economist Robert Prior- Wandesforde who also forecasts seven percent growth in the year to March 2009.

That’s still enviable by anaemic Western standards but too low for India which needs double-digit growth to rescue hundreds of millions from poverty. But despite the desire to curtail inflation, India’s HDFC Bank Chief Economist Abheek Baruah said he does not seek any rate hike.

“We’ve reached a tipping point where any further tightening could drive us into a phase of prolonged slowdown,” he said. “In 1997 we went into a recession for about five years and the most visible trigger was a sharp rate rise. The government has banned the export of cooking oils and cut some food import taxes to contain prices.

But analysts say inflation looks set to march higher and could be a key issue in elections due by May 2009 with the opposition calling the price surge a “great betrayal of the common man.” In 1998, the Bharatiya Janata Party was turfed from power in two states when onion prices jumped six-fold.

The “onion factor” also led to the defeat of the leftist and now defunct Janata Party in national polls in 1980. “The price of onions made the government weep in the 1980 elections. Watch out for the onions, prime minister (Manmohan Singh),” wrote veteran columnist M.J. Akbar recently.

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