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Drought impact pushes inflation rate higher

An increase in food prices pushed India's wholesale inflation rate higher in the week ended July 6, according to data released on Sunday by commerce and industry ministry.

Analysts said inflation could rise further in the weeks ahead because of the impact of the country's worst drought in a decade. A dearth of monsoon rains have impacted several crops in the key grain-bowl states of the country although the government has yet to announce a damage estimate.

The data showed the year-on-year inflation rate, measured by the wholesale price index, rose to 2.73 per cent in the week ended July 20 compared with 2.48 per cent in the previous week.

"Sentiment in the agricultural market has been hit by the drought and the behaviour of the monsoon rains and this is reflected in prices," said Saumitra Chaudhuri, economic adviser with credit rating agency, ICRA Ltd.

The June-September monsoon is crucial to India's economy as agriculture accounts for nearly 25 per cent of GDP -- employing 70 per cent of India's more than one billion population -- and is one of the main drivers of demand in rural areas.

The index for the food articles group rose by 1.2 per cent to 180.5 from 178.4 for the previous week, because of higher prices of fruits and vegetables and coarse grains, the data showed.

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Prices of pulses and edible oils however, declined and the index for manufactured product group rose by 0.1 per cent to 146.6 from 146.4.

"These prices will also go up as the full impact of the drought becomes clearer in the coming weeks. The inflation rate is expected to go up to 3.0-4.0 per cent," said D H Pai Panandikar, director-general with the RPG Foundation, a private economic think-tank.

India's inflation levels have been hovering at a 20-year-low in the past six months as demand for goods has been low due to an economic slowdown. Foodgrain stocks, which are presently at record levels, have also kept food prices from rising.

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