Inflation to stabilize after 6 months: Study

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New Delhi, May 25: A survey by PHD Chamber of Commerce of its member companies today brought out the high inflationary expectations that are building in the economy and forecast that the measures taken by the government will take atleast six months for inflation to plummet to 4-4.5 per cent.

It said the inflationary expectations at present are rising not only on account of global economic imbalances but also due to systemic disturbances in the domestic economy. The study says an increase in prices of petrol and petroleum products is emminent and inevitable because of high under-recoveries of oil marketing companies. This will have a cascading effect on the economy, fuelling prices all around.

With the Assembly elections due in November and General Elections next year, as many as 90 per cent of the companies felt the government would undertake populist programmes leading to substantial increase in public expenditure.

This will not only adversely affect the government's finances, but also enhance its borrowings and consequently, impact prices.

The silver lining is the food prices, which as a consequence of an expected bountiful monsoon, would come down.

If, however, the monsoon belies expectations, inflationary pressures would mount further in the next six months with inflation rate going haywire.

The Chamber's survey is disappointing news for the UPA government as its primary opposition, the BJP, will make prices a major election plank.

The proceedings in the recent monsoon session of Parliament were blocked for several days with the Opposition and the supporting Left parties accusing the government of failing to curb price rise, especially of essential commodities.

Assembly elections are due in four states, namely, Delhi, Rajasthan, Madhya Pradesh and Chattisgarh.

A good monsoon alone can bail out the government, which is now faced with difficult option of hitting growth to curb inflation.

The survey adds that the possibility of a further rise in international commodity prices cannot be ruled out. Already prices of wheat, rice, rubber maize, milk are on the ascent on account of a number of reasons like economic growth in emerging economics such as Asia and Africa, dwindling food stocks, drought in Australia and diversion of agri land towards cultivation of bio-fuels, it said.

The indusry's opinion is, however, divided about the impact of the implementation of the Sixth Pay Commission on prices. Around 50 per cent of the respondents feel the implementation of the Sixth Pay Commission Report will entail a substantial cost to the exchequer and further fuel inflation in the country.

The increased inflows of funds into the system on account of a rise in purchasing power would increase commodity prices, rentals, real estate in the economy.

Industry also cites past experience to show that there would be some impact on prices, though with a lag effect, once the Pay Commission Report is implemented.

However, some are also of the view that there are other pressing factors, apart from the Pay Commission Report, which would trigger inflation in the short run.

The factors that abate inflationary pressures include increased inflow of FDI, portfolio investment and remittances. This would necessitate RBI to sterilise the influx of foreign exchange with matching induction of rupees in the market, thereby exerting inflationary pressures on the economy.

Despite this, industry is hopeful that the steps taken by the government would succeed in bringing down inflation from the current level. In fact, 63 per cent of the respondents felt that monetary and fiscal measures initiated by the government would eventually help to bring down inflation.


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