Revision in March inflation worrisome: Saumitra Chaudhuri

Led by rising prices of vegetables and petrol, inflation moved up to 7.55% in May from 7.23% in the previous month. Citing reading on May inflation number, Saumitra Chaudhuri, member, Planning Commission said: "Inflation is rather stubborn at an embarrassingly or inconveniently high level, but is not increasing."

The headline inflation number for March was revised upwards to 7.69%, from the provisional estimate of 6.89%, this sharp revision is a serious concern, he said. Meanwhile, he feels that tight liquidity is a bigger problem facing the economy at this point in time. "Liquidity is extremely tight domestically. We know that overseas funds are difficult to tap. There is a big scrunch on the liquidity front and it has to be addressed in some of several ways." However, tweaking policy rates would not severe the purpose, he added. Below is the edited transcript of Chaudhuri’s interview with CNBC-TV18. Also watch the accompanying video. Q: What is the sense you are getting on inflation as an economist? Does it look like to be under control or do you think it requires work for reining it in? A: I don’t think you can describe inflation as being under control. The headline number for May is higher than April. But if you look at the manufactured goods you don’t see as sharp uptake as you might have expected given the fact that the rupee has lost significantly in external value and imported goods would therefore have cost more. So, the upward was expected that was slightly higher than April and mostly will probably run a figure of 7.4-7.5%, I had a figure of 7.4%. It is not exceptionally outside that range, but the worrisome numbers are that the figures for March have been significantly revised upwards. People might infer from that, that such similar upward revisions may not happen in month of April and May. It hasn’t so far, March is bit of an exception, but let’s hope it doesn’t happens. Given that I won’t say it is in control, but I won’t say that is also out of control. Inflation is sort of rather stubborn at an embarrassingly or inconveniently high level, but it’s stubborn, but is not increasing is all I can say. Q: Is there scope then to lower interest rates especially if your average forecast going forward is around 7.6% even with the March revision? A: I don’t think that’s an appropriate question to ask. I think the bigger issue is liquidity. Liquidity is extremely tight domestically. We know that overseas funds are difficult to tap. There is a big scrunch on the liquidity front and it has to be addressed in some of several ways. Changing policy rates would really not do this function of ideally making more liquidity available, which is what there is a necessity for. The limited inferences are liquidity is tight and it needs to be eased in one way or another way. I don’t think policy rates are really germane to this issue. Of course the reduction in policy rates makes people feel good, but other than that I don’t think it will transmit very much. The second part of the problem is that inflation is still high. We have to remember what would the central bank then do going forward if inflation doesn’t come off? The issues here are of liquidity management. I would like to see what the RBI would like to do on the 18th June. I don’t have an inkling, but that would really be the issue that needs to be addressed. Q: Could we then infer from that that you would see a higher probability of a possible CRR cut come Monday and that’s how the RBI would possibly manage liquidity? A: Liquidity management by one or other means or many means. If the liquidity is stretched then one way of dealing with it is to lower the CRR ratio. The other way of dealing with it is to do more OMO operations and buy up some bonds from the market, which would preserve the overall size of the RBIs bank balance sheet because it has sold down some amount of reserves both last year and maybe this year as well. There are two options or a combination of options, but some amount of liquidity management needs to get done and of course how best to do it is something central bank knows and I don’t. _PAGEBREAK_ Q: We haven’t moved much in terms of controlling fiscal deficit, we haven’t been able to raise subsidies in the new fiscal. Under the current parameters how exactly do you see inflation panning out, will it be a sub 7% figure as an average for 2012 or we could inch up higher? A: I hope that would happen, but right now I find it difficult to conclude that that might actually happen. There are two reasons for that, one is that as you know there is a suppressed inflation still in petroleum product prices and that needs to be rectified at some point in time. If it doesn’t do that it will have a huge effect on the fiscal imbalance and make it even more difficult for finances to be made available for corporate investment. So that’s a difficult picture, but the only solution, which is to my mind productive, is to revise prices that would have some impact on inflation. Therefore, prices are still under pressure. Things can change quite rapidly if for instance let’s say advanced economies suffer more than expected at this point of time that lead to commodity price falling off sharply. We can see inflationary pressures coming off particularly to the second half of 2012, it may not happen. So, there is some uncertainty about that. But if we factor out, if we exclude the possibility that there is going to be let’s say some global developments causing a sharp drop in commodity prices there is hard to see a situation where inflationary pressures would not continue for the rest of this fiscal in India. Q: We saw that shocker of 5.3% GDP Q4, IIP is also practically zero. Do you think that we may not even grow at even 7% is there is a good chance that growth would be lower than 7% this year? A: Good chance can go anywhere depending on what your good chance is. But I would see it out balance at 7% or a little over 7% is feasible. I am saying that as things stand. things can improve and things can get worse both are possible. I would say something around 7%, little bit over 7% is very plausible  given the last year’s numbers offer a very low base especially the last three quarters to register a decent growth. Even if the level of economic activity doesn’t increase very much in absolute terms, but on relative terms because last year's base is so low. Q1 were fairly decent last year, but the balance three quarters were quite poor.