Statement of Finance Ministry on Inflation

Following is the statement on inflation issued by Deptt. of Economic Affairs, Ministry of Finance today (August 22, 2008):

"Inflation measured by WPI continues to be a matter of concern. It has touched 12.63 per cent for the week ending August 9, 2008.

Without underplaying the seriousness of the concern, Government wishes to place the matter in perspective.

There are three groups which constitute the 435 items that are taken into account for reckoning the WPI: (i) primary articles; (ii) fuel and power; and (iii) manufactured products.

For the week ending August 9, 2008, in the fuel and power group, the index was stationery at 380.4. The annual point-to-point inflation for this group also remained unchanged at 17.99 per cent.

The primary articles group consists of 98 items. The index moved from 249.5 in the previous week to only 249.6 in the week ending August 9, 2008. Yet, the annual point-to-point inflation for this group increased from 11.43 per cent to 11.83 per cent.

In the manufactured products group, the index increased from 206 in the previous week to 206.4 in the week ending August 9, 2008. This is reflected in the annual point-to-point inflation of this group which increased from 10.75 per cent to 10.91 per cent.

The point to be stressed is that the WPI as well as the inflation rate for each group is measured on an annual point-to-point basis. Hence, it is largely influenced by the trend in the corresponding week of the previous year, which is the base year. In the corresponding week of August 2007, there was:

• a decline in the index for the primary articles group
• no change in the index for the fuel and power group
• a moderate increase in the index for the manufactured products group
• the WPI for that week declined from 4.39 per cent to 4.24 per cent.

This trend of a declining WPI continued up to November 24, 2007.

Consequently, even a small movement in the index in the current year is impacted by the “base” and the WPI for the group as well as the WPI for all commodities shows a rise.

While the WPI continues to be a matter of concern and efforts are being made to address the problem through monetary steps as well as improving the supply side, it will be relevant to note that the rate of inflation for the 30 essential commodities stands, currently, at 6.74 per cent.

Government has taken the following measures to improve the supply side:

1. Government has approved open market sales of up to 60 lakh metric tonnes of wheat.
2. Government has decided to release an additional quantity of 5 lakh metric tonnes of non-levy sugar during August and September, 2008.
3. Government has introduced a Scheme for the supply of edible oil with a subsidy of Rs.15 per kilogram. Public sector undertakings will import 10 lakh metric tonnes of edible oil. 2.8 lakh metric tonnes have already been contracted for and 1.6 lakh metric tonnes have been actually imported and distributed to the States.
4. Government is examining a scheme for supply of four lakh tonnes of pulses with a subsidy of Rs.10 per kilogram."

International Investment Position of India as at the end of March 2008

The Reserve Bank of India released its annual International Investment Position (IIP) as at the end of March 2008.

The International Investment Position (IIP), compiled at the end of a specific period such as end-March, is the statement of the stock of external financial assets and liabilities of a country. The financial assets consist of the country's financial claims on non-residents and financial liabilities consist of the country's financial liabilities to non-residents. These transactions are classified according to institutional resident sectors, namely, monetary authority, government, banks, and other sectors including corporate sector. The net international investment position (the stock of external financial assets less the stock of external financial liabilities) shows the difference between what an economy owns in relation to what it owes.

I. Overall International Investment Position

1. The net IIP (Assets & Liabilities) of India as at end-March 2008 resulted in net claim of non-residents on India, lower by US$ 8.95 billion at US$ 53.01 billion from a level of US$ 61.96 billion as at end-March 2007. The decline in net claim of non-residents on India resulted due to increase in Reserve Assets and loan assets of banking sector. The net claim of non-residents on India as at end-December 2007 was at US$ 78.64 billion.
2. Among external financial assets, the Reserve Assets registered an increase of US$ 110.54 billion over the end-March 2007 and stood at US$ 309.72 billion at end-March 2008. Direct Investment abroad increased by US$ 16.78 billion during the same period and was at US$ 46.19 billion as at end-March 2008. Other Investment grew by US$ 8.33 billion, mainly due to the increase in the loan extended to non-residents by banking sector.
3. The Reserve Assets at US$ 309.72 billion exceeded the entire external debt (US$ 221.21 billion*) by US$ 88.51 billion as at end-March 2008. 4. Regarding external financial liabilities, Portfolio Investment (mainly covering Equity Securities) and Direct Investment in India increased by US$ 40 billion and US$ 39.26 billion respectively, at end-March 2008 over end-March 2007. Portfolio Equity Investment at end-March 2008, however, declined by US$ 5.22 billion from US$ 103.50 billion as at end-December 2007. Further, loans and trade credits components of 'Other Investment' in India increased by US$ 25.52 billion and US$ 17.98 billion respectively during end-March 2008 over end-March 2007.

II. Ratios of External Financial Assets and Liabilities to Gross Domestic Product (GDP at current market prices)

1. The ratio of net IIP of India to GDP was -4.5 per cent as at end-March 2008 as compared with -6.5 per cent as at end-March 2007.
2. The total external financial assets to GDP (at current prices) ratio increased to 32.4 per cent as at end-March 2008 from 25.9 per cent as at end-March 2007. The Reserve Assets to GDP ratio stood at 26.3 per cent as at end-March 2008 as compared to 20.9 per cent as at end-March 2007. The ratio of total external financial liabilities to GDP increased from 32.4 per cent as at end-March 2007 to 36.9 per cent as at end-March 2008.
3. Among the external financial liabilities, the ratio to GDP, of all the three components, i.e. Direct Investment, Portfolio Investment and Other Investment witnessed an increasing trend from end-March 2006 to end-March 2008.

III. Composition of External Financial Assets and Liabilities

1. As at end-March 2008, of the total external financial assets, Reserve Assets accounted for around 81.2 per cent, followed by Direct Investment and Other Investment accounting for 12.1 per cent and 6.5 per cent respectively.
2. As at end-March 2008, around 45.9 per cent of country?s external financial liabilities were in the form of Other Investment, i.e. trade credits, loans, currency & deposits and other liabilities, followed by Portfolio Investment and Direct Investment accounting for 27.5 per cent and 26.6 per cent respectively. Further, 'loan' and trade credit had 24.5 per cent and 10.5 per cent share respectively, in the total external financial liabilities of the country, whereas "currency & deposits" accounted for 10.3 per cent.

IV. External Debt Liabilities vis-à-vis External Non-Debt Liabilities

The share of non-debt liabilities to total external financial liabilities which increased continuously from 40.9 per cent as at end-June 2006 to 49.4 per cent as at end-December 2007, declined to 48.2 per cent as at end-March 2008.