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        Inflation as measured by the wholesale price index (WPI) has, at six per cent in the week ending 6 January, crossed the Rubicon of 5.5 set by the Reserve Bank of India. As measured by the Consumer Price Index, it has crossed 7 per cent. Obviously, the hike in the repo rate has not worked. Hence the roots of the inflationary surge need to be scrutinised. Such scrutiny would reveal that the main force behind the surge is the Consumer Price Index having gone up beyond 7 per cent. Every one is complaining that food prices are rising at rates unprecedented in recent times. Of course, the Union Finance Ministry has been reiterating over the past several weeks that food prices are pushing up the inflation rate.

        This can only be partly true because only an overview of all price movements could offer a more credible answer. An assessment on these lines indicates that the prices of manufactured goods have also gone up at a faster rate. This, in turn, is due to the existing production capacities being stretched. It confirms the view that this inflation is caused by the over heating of the economy, which means that it is a demand-pull inflation reflecting supply restraints. The solution is easing supplies. In respect of food products, the remedy could be imports and drawals from storage. The former is ruled out in most cases by the unfavourable conditions in the world markets. As for the latter, the record is a shame : Storage capacity has not expanded as warranted by need and deficiencies in preservation of food grains in storage leave a lot to be desired. The practice of finding storage space in school playgrounds and in classrooms during vacation is as much alive as it had been in the past decades.

        Industry does not concede any lag in the progress of manufacturing units. It is pointed out in this connection that industry grew by 14.4 per cent in November and 10.6 per cent in the first eight months of the current financial year. Indeed third quarter results have been impressive with industrial majors reporting 40-100 per cent increase in net profit. Even the output of infrastructure industries showed an increase in output by 7.8 per cent against 5.2 per cent in the corresponding period of the previous year.

        Electricity generation was up by 7.3 per cent in the first eight months of 2005-06 while cement and steel output grew respectively by 10.6 per cent and 7.2 per cent. The backdrop here is that inflation is ruling at 5.9 per cent for manufactured items and at a shocking 9.3 per cent for primary articles. Another relevant detail here is that exports growing at a sturdy 39.5 per cent rate, which is driving industrial growth, would run into a hurdle when, as expected, the US economy slows down. Also rising capital flows and remittances add to the constant upward pressure on the rupee. Which means that these flows that have provided the impetus for India's biggest industrialisation may hit a speed breaker. These constitute signals of an impending inflationary spiral which has to be set at nought by anticipatory measures.

        Obviously, the Reserve Bank would have realised that the challenge cannot be met through hikes in repo rates because the effects of those rates would be offset by capital flows breeding greater liquidity. The resort of the RBI has to be to quantitative controls in the form of a hike in the Cash Reserve Ratio. It is indisputable that even this could work only for the medium term. Hence a long term solution through a comprehensive approach to deal with food and non-food inflation has to be worked out to keep the economy moving on an even keel.