INFLATION genie jumps out of bottle
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.