Food, fuel prices begin to haunt Indian policy makers

In a double whammy on the economic front for the Narendra Modi government, India’s retail inflation rose sharply to a 15-month high of 4.88 per cent in November from 3.58 per cent in previous month, while industrial production fell to a three-month low of 2.2 per cent in October.

A rising inflation and slowing industrial production is a bad news for the Modi government when it was looking for a turn around in the economy after being hit by demonetisation and GST jitters.

Retail inflation based on consumer price index breached the RBI’s medium-term target of 4 per cent. Earlier this month, RBI had refused to cut interest rates on fear of increase in inflation despite pleas from the industry. Hardening inflation means that RBI is unlikely to go for any interest rate cut in the current fiscal.

The concern is that the jump in retail inflation was led by foods prices which increased to 4.42 per cent in November against 1.9 per cent in the preceding month hitting the common man.

The vegetable prices jumped by 22.48 per cent in November and prices of protein rich eggs shot to 7.95 per cent. Fuel inflation jumped to 7.92 per cent in November due to increase in international crude oil prices.

“The hardening of retail inflation in November 2017 was broadbased, with negative surprises not restricted only to food items, but posted by many of the subgroups. For instance, core inflation recorded a broad-based uptick to an eight-month high 4.9 per cent in November 2017 from 4.6 per cent in October 2017,” said Aditi Nayar, principal economist at Icra.

Meanwhile, industrial output came down to a 3month low of 2.2 per cent in October after putting in two consistent months of healthy growth — 4.5 per cent on-year in August and 4.1 per cent in September. Food and fuel prices, the two item heads that contributed to slow down the economy during the UPA regime, have come back to haunt the BJP government in November. Retail inflation — the pace of increase in retail prices — has hit 4.88 per cent despite a contraction in pulses’ prices due to bumper crop.

“The jump is largely food and fuel led, partly spilling over to the core pressures. Latter also got a lift from HRA increases and slower pass-through from GST reductions. Looking ahead, while oil prices continue to grind up, food will play an important part in dictating the scale of increase, as winter arrivals start trickling in,” said Ms. Radhika Rao, India Economist, DBS Bank.

Though corporators complain of high cost of funds in India due to higher rate of interest, the higher inflation would rule out any RBI intervention to bring down capital cost — adding to current woes of the Indian industry.

“No chance for a rate cut anytime soon. There could be a long pause from the Reserve Bank now .... The RBI may not change its stance till June next year,” said Mayank Prakash, fund manager, BNP Paribas Mutual Fund.

According to Jaikishan J. Parmar, research analyst, Angel Broking, the real surge in inflation came in rural inflation which sharply moved up from 3.36 per cent to 4.79 per cent.

Higher prices in rural India in the midst of agrarian distress could push RBI and the Centre take strong disinflationary steps, which may have negative cascading effect on corporates in the short term. “If the inflation pressure continues beyond this level, one can expect the central bank to change its policy stance to hawkish, but that’s unlikely to happen anytime soon,” said Sunil Sinha, director, India Ratings.