INFLATION...

the disruption on account of the second wave of Covid-19 infections. However high-frequency indicators from July onwards offer a mixed picture of the prospects of economic recovery, even as the government maintains that a robust recovery is underway.

Food prices, which have a share of 39% in the average CPI basket, were the driving factor behind the moderation in inflation. While food inflation, in year-on-year terms, came down from 5.1% in June 2021 to 4% in July 2021, the non-food component of CPI moderated to just 6.7% in July compared to its last month’s value of 7%. Core inflation, which is the non-food, non-fuel component of the CPI basket, also showed stickiness, growing at 6.1% in July compared to 6.4% in June. July is the seventh consecutive month, when core inflation has ended up higher than the non-core component of CPI.

The Monetary Policy Committee of RBI projected inflation at 5.9% in the September quarter and 5.7% for the entire fiscal year.

Headline numbers for food inflation need to be read carefully as they hide pressure and pain points in the food economy. Prices of both the cereals and products and vegetable subcategories contracted for an unprecedented sixth consecutive month, even as edible oil prices continued to grow at more than 30% on a year-onyear basis for the third consecutive month. Pulse prices, too, grew at 9%. Cereals and vegetables constitute a majority of the domestic production basket, whereas India depends on imports for both pulses and edible oils. A contraction in the prices of major domestic crops and a rise in prices of imported edibles along with a faster increase in prices of non-food items is bound to put pressure on farm incomes, in turn dampening rural demand.

Given the fact that the June 2020 numbers for IIP were very low because of the 68-day lockdown, which was imposed from March 25 onwards, and there were significant restrictions this June because of the second wave of Covid-19 infections, the 13.6% year-on-year growth in June 2021 IIP is not a very useful metric of the extent of economic recovery.

What is certain, however, is the fact that factory output did not reach pre-pandemic levels in the April-june quarter of 2020-21. This is in keeping with a similar projection for the overall economy by RBI’S MPC in its latest meeting. IIP was at 130.4 in the quarter ending June 2019 and reached 121.8 in the quarter ending June . To be sure, it was at 137.4 in the March quarter, higher than the pre-pandemic value of 135.4 in the March 2019 quarter, but the second wave changed its trajectory.

“The latest inflation numbers hide the pain points for cereal