By K R Sudhaman

Prime Minister Narendra Modi has done reasonably well in managing the Indian economy during the difficult two years of covid pandemic despite several challenges by ensuring food security to millions of people who became jobless. This has won accolades from World Bank and International Monetary Fund. But the major challenge is now when Inflation has started raising its ugly head at a time when the Indian economy is on a revival mode making it that much difficult to maintain growth momentum.

Finance Minister Nirmala Sitharaman however maintains that India has not breached the inflation target “so badly” while referring to the recent surge in consumer price inflation, which hit a 17-month high of 6.9 per cent. Consumer price inflation is also called retail inflation. But at the same breadth, she admitted that the economy faced several challenges such as rising global crude oil prices, which is the main trigger for inflation. Rise in Fuel prices has a cascading effect on prices and any reduction on high taxes on fuel in India will reduce government revenue drastically which in turn will reduce government’s capital expenditure thereby retarding growth momentum.

Former Prime Minister Manmohan Singh used to repeatedly say Inflation is in a way tax on poor. High Inflation coming at a time when jobs are scarce is even worse. So it is therefore going to be tight rope walk for the government to balance growth and inflation that too at a time when the economy needed to be kick-started. Already growth projections have been recalibrated to a lower level by several think tanks including multilateral agencies.

It is therefore worth analyzing how the inflation is surging in India and its impact on the economy in the coming months. Crisil research has recently analysed the rising inflation.  According to Crisil chief economist Dharmakirti Joshi Inflation based on consumer price index surged to 7 per cent on year in March 22, compared to 6.1 per cent in February and 5.5 per cent in March 2021. With this, the headline inflation has climbed a full 100 basis points above the Reserve Bank of India’s upper band of tolerance set at 6 per cent. Food, the most volatile component of CPI, has been the key driver of inflation surging 7.7 per cent in March from 5.9 per cent in February.

Crisil study also shows that all commodities except pulses saw a rise in inflation, with the sharpest jump seen for vegetables at 11.6 per cent in March versus 6.1 per cent in February. Meat and Fish increased by 9.6 per cent as against 7.4 per cent in the same period. Cereals rose by 4.9 per cent as against 4 per cent. Pulses however provided a respite at 2.6 per cent as against 3 per cent.

Core inflation rose to 6.4 per cent from 5.8 per cent with a broad based rise across goods and services inflation. The sharpest rise was seen in personal care and effects at 8.7 per cent from 5.5 per cent, Clothing and footwear 9.4 per cent versus 8.9 per cent and household goods and services7.7 per cent versus 7.2 per cent and health services 7 per cent versus 6.8 per cent.

Strangely Fuel inflation moderated to 7.5 per cent from 8.7 per cent as domestic prices of petrol, diesel and liquefied petroleum gas were only raised in the second half of the month. But going forward fuel inflation will be a matter of concern with the ongoing Russia-Ukraine war that would disrupt supply of crude oil. India imports 80 per cent of its crude oil requirement.

Justifiably, Crisil analysis shows the poor are bearing the burden of inflation the most, given that food, which occupies the largest share of their consumption basket—recorded the sharpest rise.

Using the National Sample Survey data, “we estimate average expenditure across three broad income groups – the bottom 20 per cent, the middle 60 per cent and the upper 20 per cent of the population, and mapped them with the inflation trend,” Joshi said adding “we have estimated this separately for the rural and urban areas. We find that the rural bottom 20 per cent faced highest inflation of 7.7 per cent in March….In urban areas too, it was the bottom 20 per cent that faced the highest inflation of 6.4 per cent.”

With upward pressure rising, inflation is becoming broad based, which is not good. Last year low food inflation had contained the headline number, while fuel and core inflation had risen. The upside risks on food have risen further after the Russia-Ukraine war. After a year of double-digit wholesale price index inflation, cost pressures have also increased for Indian producers. Improving demand conditions will enable them to pass this on to a great extent to retail prices, particularly in services where inflation was subdued so far due to incomplete pick-up in activity. That apart there is also pressure of fuel inflation, which had cascading effect on all prices.

While Inflation target might not be breached so badly as finance minister says but going forward the picture is not all that rosy and this had come at a time when exports are doing well, people have started getting back jobs and economic revival is taking place. A small dose of inflation is good as it will have a multiplier effect in economic revival but a large dose could work otherwise.

The task cut out for RBI is very difficult as deft handling will be required to keep prices under check while pushing growth. RBI has handled the situation well in the last monetary policy. It sent the right signals to growth momentum by keeping the short-term rates unchanged, even as it dealt with excess liquidity through other measures. This kind of jugglery cannot go on forever and might have to take the bull by the horn, which meant stunting growth. It will be interesting to watch how this inflation challenge is addressed through some out of the box fiscal and monetary measures by the government and RBI. (IPA Service)

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