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BW Businessworld

Under A Cloud

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It's not even raining, when it should be pouring. The bad news is that the probability of inflation hitting double-digit levels in the next few months is higher than we imagine.

Once again, the cause will be higher food prices. Here's why.

First, rainfall from the south-west monsoon is about 22 per cent weaker than normal thus far. The sowing of rice, oilseeds and pulses has been quite low. Oilseeds and pulses are a particularly big worry; even last year, when agricultural growth was at over 5 per cent, it was a bumper rice crop that pushed that growth rate up. Oilseeds and pulses production was below normal, and is likely to remain low this year as well. Agricultural growth will be under 2 per cent.

Second, agricultural productivity suffers; the kharif crop in a normal monsoon has a cycle of 110 days. When rainfall is below normal, farmers use seeds that follow a 90- day cycle. Historically, yields from crops that mature in a 90-day cycle are about 15-20 per cent lower than in a normal cycle.

Third, while more areas are getting rainfall, water storage levels in reservoirs across India are estimated to be at the lowest in a decade. That means that water for irrigation in the key states of Punjab and Haryana will be much lesser than required.

Fourth, the latest wholesale price index (WPI) numbers appeared to indicate inflation was moderating, but that's misleading. Take electricity, which has a 3 per cent weight in the WPI (food has 20 per cent). Eight states have raised tariffs; but the prices reflected in the WPI haven't been changed since October 2011, before the tariffs were hiked. More states are likely to hike tariffs.

How does it all add up? The latest inflation number is 7.55 per cent; the adjustment of electricity prices will add about 30 basis points. A diesel fuel price hike —  it's inevitable and overdue — will add another 40 bps directly and perhaps 10 bps indirectly.

Add the effects of rupee depreciation not yet passed through, and inflation will be in double digits for the rest of the year.

Think of the Rubaiyat of Omar Khayyam: "And that inverted Bowl we call The Sky, Whereunder crawling coop't we live and die, Lift not thy hands to It for help —for It Rolls impotently on as Thou or I."

(This story was published in Businessworld Issue Dated 30-07-2012)