DK Srivastava, chief policy adviser of EY India, tells ET: “Global supply constraints will continue as there is no sign of an early resolution of the Russia-Ukraine war. Petroleum prices will remain high. In this geopolitical scenario, inflation in India may remain at 6% and above till December 2023.”
Deloitte’s chief economist in India Rumki Majumdar, paints a somewhat optimistic scenario. “We expect inflation to come down to below 6% in the first half of 2023,” she says, adding that inflation will fall more sharply if China, the world’s second largest economy after the US, slows down faster than expected. RBI, too, has projected inflation in India to decline below 6% by the first quarter of FY24.
Majumdar has one more concern — usually if inflation remains elevated for a long period, it feeds into expectations. “It (inflation expectation) then pushes up core prices (excluding food and fuel prices, which are highly volatile) that often tend to be sticky down,” she says.
Inflation expectations is the rate at which people expect prices to rise while making decisions on future economic activities. As it influences investments of households and businesses, the expectations have an impact on actual inflation. For example, if someone looking to purchase a new refrigerator believes that its price could rise in the coming months, she might be tempted to buy it instantly. If more and more consumers behave in a similar fashion and buy up things on the assumption of future price rise, it will fuel demand, thereby defeating the central bank’s usual tactic of demand reduction as an effective inflation-mitigation tool.
RBI’s retail inflation target is 4% with a tolerance band of plus and minus 2% around it. That means, inflation below 2% and above 6% can’t be tolerated. For four years prior to the Covid outbreak, inflation was tamed effectively, making it a virtual non-issue in economic discourse. Retail inflation averaged below 4% between 2016 and 2020 before breaching the tolerance level in the first year of Covid (6.2% in 2020-21). In no time inflationary pressure was managed, bringing it down to 5.5% in 2021-22.
“Inflation was projected to ease to 4.5% in 2022-23 as recently as February 2022. The war in Ukraine has altered the outlook drastically,” said RBI’s deputy governor Michael Debabrata Patra in a speech in New Delhi on August 24. Retail inflation climbed to the peak of 7.8% in April before beginning to moderate. In July, inflation was 6.7%, down from 7% in June, mainly due to the easing of food prices.
Meanwhile, the annual rate of inflation based on Wholesale Price Index (WPI) was 13.9% for July, triggered by rise in prices of items such as minerals, food articles, petroleum products, basic metals, electricity, chemicals et al. WPI inflation was even higher at 15.18% in June. Government of India (GoI) anticipates a softening of inflationary pressures “as the prices of important raw materials such as iron ore, copper, tin, etc. that feed into the domestic manufacturing process, globally trended downwards in July 2022,” according to Union finance ministry’s
monthly economic report for July.
The report also highlighted the steps GoI has taken to check inflation such as releasing the buffer stocks of rice, pulses and onions, and imposing
export restrictions on wheat. Understandably India’s central bank has swung into action.
“The RBI has embarked on a front-loaded monetary policy response, with a cumulative 140 basis points increase in the policy rate so far,” Patra said in his speech, reiterating the RBI’s resolve to withdraw accommodations to rein in inflation. For the current fiscal year, the central bank has projected headline retail inflation at 6.7%.
Srivastava of EY believes the RBI will raise the policy rate further by 50 basis points, in two tranches of 25 points each, by February 2023 to pull down inflation to a tolerable bracket. Mahindra Group’s chief economist Sachchidanand Shukla has a different take. He feels the RBI will increase the policy rate by 35-40 basis points but in one go.
“RBI has to front-load it to have the necessary impact on inflation. To my mind, retail inflation will climb down below 6% by March 2023,” he says.
He adds that the volatile crude oil graph — declining below $100 a barrel before jumping back — will remain the joker in the pack when prices of edible oils and other food items have eased, with supply chains getting unclogged.
As high inflation in India and across the world is destined to last for several months, if not a year or more, according to most forecasts, the question that crops up is what will be its fallout on the Indian economy in general and on India Inc in particular?
KV Subramanian, former chief economic adviser to GoI and executive director-designate at the International Monetary Fund(IMF), tells ET that elevated inflation will have more impact on investments than on consumption, arguing that Indians don’t often borrow for food or holidaying. As far as investments are concerned, debt is invariably a larger component, he says, a reason why fallout will be palpable as borrowing will turn costlier after the RBI’s multiple rate hikes recently.
“Investments kick in when interest rate is benign,” adds Subramanian.
“But I feel India Inc should invest because the impact of the global slowdown in India would be marginal.”
Economist Shukla of the Mahindra Group, citing their own study of 800 nonfinancial companies for FY21 and FY22, argues that an uneven, K-shaped recovery
has been visible both among companies and consumers.
For example, the top decile of the surveyed companies constitutes 85% of total profit whereas 40% firms did not see profit at all in the last eight quarters. Even in the consumer segment, Shukla explains, higher discretionary incomes and positive wealth effects helped some individuals indulge in revenge consumption while those in the lower income segment reeled from high inflation and income shocks.
Shukla adds, “The demand from the top end of the pyramid remains high as companies are selling premium cars, luxurious homes and big television sets far too easily. Cars priced over `10 lakh, for example, are selling five to seven times faster than those with lower sticker prices.”
It’s high time the RBI stepped up its market based intelligence gathering instead of deploying old inflation-mitigation measures.