Inflation strains mount for India's new government

Mumbai: New Indian Prime Minister Narendra Modi's promises to revive the economy face a gathering threat from inflation, which is creeping up again due to oil prices, weak monsoon rains and hoarding, analysts say. Food inflation, one of the reasons voters resoundingly ejected the previous Congress government in elections in April and May, is gathering pace with troublesome onion prices in the spotlight.

The new government announced measures last week to tackle the problem after winning the general election on a platform of good governance and jump-starting the economy, which is growing at its slowest pace in a decade. "All efforts will be made to ensure there is no shortage of onion, potato and tomato anywhere in the country," said Food Minister Ram Vilas Paswan on Thursday, blaming hoarders for the problems. He called on onion producer states such as Maharashtra, of which Mumbai is the capital, to ensure uninterrupted supplies of the staple vegetables to keep prices steady. The day before, the government announced a minimum export price for onions of $300 per tonne in a bid to prevent overseas sales and reduce prices in the local market. Tackling hoarders -- large traders who keep food in stock while waiting for prices to rise -- has long been a priority for Indian governments, but with few results.

Analysts say the new attempts to slam a lid on prices are a good first step by the Modi government -- although there are limits to how much the central government can do without state cooperation. "Cartels are unfair business practices. So cracking down on such won't make the PM anti-business. Such steps are needed to control inflation expectations," said Rupa Rege Nitsure, chief economist at Bank of Baroda. The Wholesale Price Index, the most closely watched cost-of-living indicator, rose to 6.01 percent in May driven by food and fuel prices -- the highest figure since December and compared with 5.20 percent in April.  

Deficient monsoon: Other inflationary factors are beyond Modi's control. Global oil prices have been rising as worsening strife in Iraq triggers fears of supply disruptions -- a key concern in India, which imports more than 80 percent of its crude oil needs. India is one of the world's top producers of rice, wheat and sugar but relies heavily on the southwest monsoon, which sweeps the subcontinent from June to September to water its crops. This year the annual downpour looks threatened by the El Nino phenomenon, a warming of waters in the Pacific that has in the past -- but not always -- led to a weaker monsoon in India.

The India Meteorology Department says rains have been deficient over 80 percent of the country so far. Further price rises threaten to hit tens of millions of India's poor who live on less than one dollar a day, and who have already struggled with high levels of inflation for years. The Reserve Bank of India chief Raghuram Rajan, who has raised interest rates three times to tame consumer prices since coming to the helm in September, told reporters last week that combating inflation would continue to be the priority in the next few quarters. Without the government's help to tackle inflation, Rajan is unlikely to cut interest rates any time soon, despite the clamour from businesses for lower borrowing costs to spur the economy. "One lever which is key to reviving growth goes missing if inflation is not tamed," said D.K. Joshi, chief economist with rating agency Crisil.