IN­FLA­TION ge­nie jumps out of bot­tle

Financial Chronicle - - FRONT PAGE - FC BU­REAU

THE Modi gov­ern­ment has a dual chal­lenge at hand. Faced with the tough job of re­viv­ing a stut­ter­ing econ­omy, the Cen­tre now also has an uphill task of keep­ing prices sta­ble. For the three-and-ayear-old Modi gov­ern­ment, which has been high on prom­ises but low on de­liv­ery, ris­ing in­fla­tion poses a new worry.

The gov­ern­ment data of prices re­leased on Thurs­day showed in­fla­tion mea­sured on whole­sale prices (WPI) has risen to four­month high of 3.24 per cent in Au­gust on soar­ing prices of food ar­ti­cles, par­tic­u­larly onion, and ris­ing fuel price. Diesel and petrol cost con­tin­ued to sky­rocket, adding to the woes of com­mon man. Sig­nif­i­cantly, the hike in fuel cost comes when global crude oil prices are more or less steady.

The up­set­ting whole­sale price index fol­lows a steep rise in re­tail prices. Ac­cord­ing to gov­ern­ment data re­leased ear­lier this week, con­sumer prices based in­fla­tion (CPI) shot up to its five-month high of 3.36 per cent in Au­gust due to costlier fruits and veg­eta­bles.

The price surge is closer to the up­per limit of the Re­serve Bank of In­dia’s in­fla­tion ex­pec­ta­tion at be­tween 2 and 3.5 per cent till Septem­ber this year. There is also added worry that food prices may surge in the com­ing months af­ter floods dev­as­tated farms in cen­tral and east­ern In­dia.

Spi­ralling prices prove that the Re­serve Bank of In­dia was spot on in its as­sess­ment of in­fla­tion while main­tain­ing a neu­tral stance. In its last pol­icy re­view, the RBI had said it would en­deav­our to keep re­tail in­fla­tion close to 4 per cent in the near term, but there might be some uptick on ac­count of pay com­mis­sion pay­outs and price ad­just­ments post GST roll­out from July 1.

Prior to this, the RBI’s stance on in­fla­tion has led to a schism be­tween the cen­tral bank and the gov­ern­ment, with chief eco­nomic ad­viser (CEA) Arvind Subra­ma­nian be­ing vo­cal in his crit­i­cism of RBI’s fore­cast while de­mand­ing a steep cut in lend­ing rates. Subra­ma­nian had ar­gued that in­fla­tion has been well be­low RBI’s tar­get, while eco­nomic growth was de­cel­er­at­ing.

With the lat­est in­fla­tion fig­ures, RBI gover­nor Ur­jit Pa­tel stands vin­di­cated. He, how­ever, will be un­der pres­sure in the pol­icy re­view next month as the econ­omy is strug­gling with slack in­dus­trial out­put. Pri­vate in­vest­ments have slowed and there is sup­ply chain dis­rup­tion af­ter de­mon­eti­sa­tion and im­ple­men­ta­tion of the goods and ser­vices tax.

In­dus­trial pro­duc­tion grew by a mea­gre 1.2 per cent in July with man­u­fac­tur­ing sec­tor re­main­ing a showspoiler. The GDP for the quar­ter end­ing June 30 slipped to its three-year low of 5.7 per cent as the ef­fect of de­mon­eti­sa­tion cast its shadow on the econ­omy.

Mean­while, an SBI Re­search re­port has fore­cast that the GDP may re­main be­low six per cent in the sec­ond quar­ter of 2017-18 due to muted agri­cul­ture growth and slug­gish per­for­mance of man­u­fac­tur­ing and min­ing sec­tor.

“Sec­ond quar­ter growth num­bers are likely to be muted, al­most like the first quar­ter num­bers (be­low six per cent), and the rea­sons are many,” the ‘SBI Ecoflash’ re­port said.

“The GDP growth of 5.7 per cent in Q1 FY18 has raised con­cerns about FY18 an­nual GDP num­bers. We be­lieve that it would be at 6.5 per cent with a down­ward bias. Q2 growth num­bers are likely to be muted, al­most like the Q1 num­bers (be­low six per cent), and the rea­sons are many. The sup­port that Q1 got from trade, ho­tel, trans­port and pub­lic ex­pen­di­ture will not be there in Q2,” the SBI re­port said.

“Agri­cul­ture growth will be muted as rain­fall in the first three months of Mon­soon was hugely deficit in key food­grain pro­duc­ing states like UP, Pun­jab, Haryana and MP. July IIP data shows that pro­duc­tion was par­tic­u­larly weak in con­sumer durable goods (1.3 per cent). Even all such im­prove­ments in Q3 and Q4 num­bers will pos­si­bly keep GDP growth sub-6.5 per cent for FY18,” the re­port added.

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