India and Other Emerging Economies Continue to Struggle With Inflation

By Jason Simpkins
Associate Editor

India's wholesale price index rose 7.82% for in the week ended May 10, the Ministry of Commerce and Industry reported. It marked the 13th straight week that the inflation rate has been above the central bank's 5.5% target, highlighting the increased pressures many developing nations are under given soaring commodities prices.

The rate of inflation for the week ended May 15 is expected to be 8.02%, the highest level since September 2004, according to Bloomberg News.

"The current high level of inflation is totally unacceptable, especially in terms of impact on inflationary expectations," Reserve Bank of India (RBI) Governor Yaga Venugopal Reddy told reporters last week.

Authorities have tried their best to rein inflation in without compromising economic growth. The central bank has left its key interest unchanged but has tightened cash conditions by raising its cash reserve ratio - the amount of cash banks must keep on hand - by 25 basis points to 8.25% as recently as April 29.

The government has stepped in over the past two months to reduce import duties, ban futures trading, halt the export of cement, rice, wheat, and edible oil, and implored steelmakers and cement companies to cut prices. 

However, such measures have proved largely ineffective as commodity prices continue to soar. Oil, which climbed to a new record over $135 a barrel last week, is particularly problematic, as state oil firms currently sell fuel at hugely discounted rates. 

Selling fuel at such steep discounts cost state-run refiners about $43 billion for the year ended March 31, Serangulam V. Narasimhan, finance director at Indian Oil Corp. Ltd., said May 9. The companies lost roughly $18 billion the year before.

The government in February raised gasoline and diesel prices for the first time in nearly two years in an effort to reduce refiners' losses, but the increase has achieved little. Another "price hike is inevitable," although the "specific quantity of the price increase" was still being worked out, Petroleum Secretary M.S. Srinivasan told the AFP.

"We expect a decision in three-to-four days time," Srinivasan said.

The Press Trust of India reported, without naming sources, that the petroleum ministry was seeking a 10-rupee-a-liter increase in petrol prices and a five-rupee-a-liter hike in diesel prices.

Based on current pump prices in New Delhi, this would represent a 22% increase for petrol and 16% on diesel, according to AFP.

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India isn't the only developing nation fending off inflation. Consumer prices in China jumped 10.3% in April from a year earlier. Inflation has soared throughout Eastern Europe, rising 17.5% in Latvia, 11.4% in Estonia and a staggering 30.2% in the Ukraine, according to Bloomberg News data.

"Inflation, now in double digits in many countries, is the region's most pressing current problem," the European Bank for Reconstruction and Development said in a recent economic outlook report. "If left unaddressed, inflation could risk price-wage spirals, exchange rate re-alignments, or could force a belated and sharp response by monetary policy."
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