inflation puzzle

While the Mandarins of North Block are looking to add policy levers to the upcoming budget to boost India’s fragmented economic recovery, the latest official data shows industrial output is staggering, with a modest 1.4% growth in November. Even more worrying is that inflation is again emerging as a threat – retail prices hit a five-month high of 5.6 per cent in December from 4.9 per cent in November. While urban India continued to record high incidences of price increases of over 5.8%, the inflation faced by rural consumers stood at 5.36% – the fastest pace since July 2021. A dozen states saw inflation higher than the 5.6 per cent level, with half of them recording more than 6.6% in print, led by Haryana and Tamil Nadu, exceeding India’s declared inflation tolerance limit of 6%. While the CPI cooled about 0.35% month-on-month, this was offset by lower base effects that drove inflation in food and beverages and higher clothing and footwear prices. The deferment of higher GST on textiles and moderation in food and vegetable prices this month may help contain some of these pressures, but there are other unfavorable conditions as well. Fuel prices eased after excise duty cut in November, but this may not last long as India’s average crude oil price is now around $84. For now, retail fuel prices remain stable, but this may have more to do with the volatile trend of not affecting such hikes in the election season. By Monday, yields on government bonds had hit a two-year high, which could, over time, upset the fiscal maths.

Inflation in wholesale prices eased slightly in December, while touching a record high of 14.2 per cent in November to 13.6 per cent, above double digits for the ninth consecutive month. Economists believe that the continued gap between wholesale and retail inflation, which is now at eight percentage points, does not bode well for further price stability. Producers facing high commodity prices and input costs must find ways to pass them on to consumers, feeding into retail inflation and further reducing household budgets. For the industry, inflation is as important a deterrent to higher consumption and growth impulses as the new virus mutation and the third wave – which in itself is expected to push up retail prices. Persistently high inflation, as seen since the start of the pandemic, not only constitutes a tax on the poor and middle classes, but also a potentially permanent criterion for future spending capacity (and growth) in the midst of a damaged job market. There is also a waste ball. The government, through its statement of intent in the Budget, and the RBI, which has noted that rising inflation across geographies may take longer than expected and will review its monetary policy stance next month, are expected to up their inflation game. What needs to be communicated is a plan to quell expectations.