Find out: Why is NIPFP extremely concerned about inflation?

In an interview with CNBC-TV18, Ajay Shah, Senior Fellow, NIPFP gave his readings about the Indian economy. He spoke about inflation and IIP numbers. According to Shah, there is a possibility of second surge in inflation ahead, and this would be driven by non- food items. 

"We are making a big mistake by tolerating this kind of high inflation and we should do all we can to get inflation back to target to 4-5% as soon as possible," he added.

Below is the verbatim transcript of his interview with Mitali Mukherjee and Udayan Mukherjee of CNBC-TV18. Also watch the accompanying videos.

Q: How are you reading the inflation situation now?

A: I am quite concerned about the way things are going though the information based that I use is quite different from what you have just described. The most important inflation measure in India is the CPI-IW. Then you see CPI is good and we all hope that it will be a good inflation measure but, it is going to take some years for the time series to build up.

For now the information that we have is the CPI-IW. With the CPI-IW when we use the month on month seasonally adjusted data we are seeing quite distinct evidence that there has been a second surge in inflation after the great crisis two years ago. So, this is just a statistical thing.

It is only a question of time to show up in the year on year inflation which is widely watched. I would recommend that the television channel should pay more attention to seasonal adjusted month on month inflation. There is a second surge in inflation that is coming.

Q: What is also worrying is the way the January figure has been revised to upwards of 9% would you say it is given that the levels we are looking at for February and March are probably a lot higher than the reported 9% as well?

A: I do not deeply understand this revision process. But, it is interesting when you go dig deeper into what is going on. Our last inflation crisis of two years ago was largely driven by food. Right now when you look at food data in the WPI food there is not that much action.

So, there is something going on in non-food and that immediately makes you start thinking about the tradable prices about the global price situation. Given the way things are going on, commodity prices and the price of crude oil it seems that that is where that this next inflation surge is coming from.

Q: Where does it leave the Reserve Bank where the only option right now seems to be how much they can do in terms of rates and in that as well they properly cannot go too much beyond what is expected right now?

A: There are two parts to this problem. The first is that when you think about a rise in price of petroleum products. We in India had a market determined price for petroleum products where the world price for petrol was the street price for petrol in India. Then what would happen is that in the last six months or last eight months there has been a sharp rise in the prices of petroleum products worldwide.

That would have translated into higher prices of petrol, LPG, diesel and kerosene and so on. That would have had some impact on consumption. People would pull back on consumption, people would partly travel less and people would partly travel by other means or people would achieve their energy and consumption through other means.People would switch technologies.

So, there is a whole array of micro economic adjustments which should be taking place which are unfortunately not taking place because we do not have a market determined rate.

Because the government is interfering in the prices of petrol, diesel and kerosene and LPG and so on. So, the consequence is that the entire world oil price hike has to fall on the macro because the micro will not adjust, the macro has to adjust and this is in two parts. The first is that they are going to see a much bigger fiscal deficit. The second is that we need a rupee depreciation to pay for that higher import bill. 

Unfortunately, that makes Subbarao