Industry chamber Assocham on Monday said that 2011 may witness continuation of high inflationary pressures, a view contrary to the government that expects inflation to slow down to around 6 per cent by March next year.
In a paper titled, 'Realising the Objective of Stabilised Inflation', Assocham said, "2011 may continue giving pain to the government on the issue of food inflation and put pressure on the manufacturing sector due to hyper-inflation."
The wholesale price inflation in the country fell to 7.48 percent in November, prompting the government to say that it will go down to around 6 per cent by March 2011. However, the skyrocketing prices of onion, garlic and tomato have dampened the government and RBI's estimates.
Food inflation for the week ended December 24 surged back to double-digit level at 12.13 per cent, after the three weeks' slide towards single-digit level.
"The major drawback of the country's inflation control strategy is that it always considers inflation as a seasonal and temporary problem", it said. "... besides the domestic climatic conditions, external market conditions, logistics deficiency, unauthorised hoarding and ineffective agriculture policy too have been the major causes of inflation," it added.
Global crude oil prices are also hovering around $95 per barrel due to increased demand in Europe on account of an unusually freezing winter.
"The current food inflation needs to be seen from two angles: one, there is a shift in income brackets with the growth of the middle class, as a result of industrialisation and growth of services raising demand pressure" according to the paper. "and two, the gap between producer prices and consumer prices is widening with retailing at consumer level a highly profitable job as demand pressure increases," Assocham said.
The Assocham papers puts the origins of the present inflationary pressure in food and fuel prices hike in the first half of 2009-10.
"By the second half of 2009-10, mainly helped by the persistent supply side pressures and bad monsoons, it (inflation) was generalised," it said. Assocham attributed the moderation in food inflation in November to factors like increase in supply due to new crop arrivals in the markets.
"The long-term supply side constraints, coupled with higher level of domestic demand pressure and hardening material and fuel prices in the external markets will not allow the inflation to soften in the near future," it said. Regarding the industrial sector, Assocham said continued hyper-inflation has been putting pressure on the Indian manufacturing sector.
"The much higher increase in the prices of primary products, wages and fuel, as compared to that of manufactured products have been eroding the price cost margins of firms," it said. Assocham said prices of fuel and primary products reflect substantial external and policy influences.
"Inflation (in manufactured products) reflects the performance of the domestic private sector and also... the exchange rate and global inflationary conditions," it said. The industry body said the prices of primary articles that had started picking up following economic recovery in 2009, continued the upward trend in the current fiscal.
"Prices of the main inputs of manufacturing sector, the primary articles, increased by 18 per cent during April-November 2010 on year-over-year basis. Higher prices of primary articles, especially rise in food prices, indirectly also effects the production...," the paper said.
Fuel inflation has registered a growth of 12.5 per cent in the first eight months of the fiscal. The chamber also warned against prevalence of intermediaries in the market and said a huge gap existed between the price received by the producer and the price paid by the consumer.
"This gap needs to be filled by creating transport and storage infrastructure to the required extent. The government needs to regulate the functioning of the agriculture markets," it said.