Recovering economy faces inflation threat
NEW DELHI: Retail inflation rose to 6.3% in May from 4.23% in April, propelled by an increase in both food and core inflation, going beyond the Reserve Bank of India’s upper comfort level of 6% for the first time since November, and suggesting that the incipient recovery in the economy may run into some headwinds. Experts say that inflation could continue to remain a challenge through the rest of the year. Wholesale inflation, meanwhile, rose to 12.94%,the highest in at least nine years, from 10.49% in April, partly on account of a low base (last May), but also because of higher fuel prices.
The inflation data, released on Monday, comes even as the bruising second wave of Covid-19 ebbs in India, and the so-called unlock process with respect to movement and activities continues. The Nomura India Business Resumption Index (NIBRI) jumped to 76 in the week ending June 13 from 67.9 the previous week. This is the highest weekon-week improvement in NIBRI since February 9, 2020. A NIBRI of 100 indicates pre-pandemic level of business activities.
The faster-than-expected inflationary surge, primarily driven by fuel prices and increase in prices of important food items such as edible oil and pulses, has the potential to squeeze both household and business incomes. The impact could be particularly severe on the poor, who are already in distress. That the inflation metrics are high is worrying experts because demand remains low. As demand rises, inflation may, too, and RBI may find itself in a quandary in choosing between keeping growth going or reining in inflation.
For the government, the numbers pose both an economic and a political challenge.
“CPI inflation is 6.3%. Do you want to know why? Fuel and power inflation is at 37.61%. Thanks to PM Modi raising petrol and diesel prices every day. Food inflation is at 6.3%... Pulses inflation is at 9.39%. Edible oil inflation is at 30%. These are high marks for competent economic management,” Congress leader and former finance minister P Chidambaram said.
“A food-fuel driven inflationary spike will burden the poor disproportionately and squeeze their purchasing power. This is bound to have an adverse effect on aggregate demand, pricing power of sellers and therefore growth,” said Himanshu, an associate professor of economics at Jawaharlal Nehru University. “Because cost of cultivation will rise sharply compared to the official projections which were made in March 2021, Minimum Support Prices will lose their remunerative cushion, generating headwinds for rural demand,” he added.
While the magnitude of jump in both retail and wholesale prices has an element of surprise, the trend was expected. Petroldiesel prices were kept frozen during the state election cycle in March-April. They have been increasing continuously since May because of rising crude prices and the reluctance of the Centre and the state to cut levies that account for almost 61% of the price of petrol and 54% of that of diesel (in Delhi).
But crude is not the only primary commodity to have experienced a price surge. The Bloomberg Commodity Index, where energy related items have a weight of only 30%, increased from its January 4 value of 78.63 to 94.5 on June 14.
The food component of CPI -it has a weight of 39% in the overall CPI basket -- grew 5% in May, a sharp jump from its April value of 1.96%. The food component of WPI grew at 8% in May.
What is remarkable about the latest surge in the food component of CPI is that this is happening despite a contraction in cereal and vegetable prices, which have a weight of 40% in the CPI food basket.