NEW DELHI: The spectre of stagflation has come to hauntIndia’s policymakers again with headline inflation accelerating to an unexpectedly high 7.23% in April from 6.89% in the previous month on dearer food and manufactured items, amid signs of a further weakening of investment climate.
This has complicated the central bank’s task of striking a widely acceptable balance between its aims of controlling inflation and pushing growth.
Prime Minister’s Economic Advisory Council chairman C Rangarajan warned on Monday the inflation numbers were “a very uncomfortable statistic”and clearly indicated that the Reserve Bank ofIndia’s room for further monetary easing at the June review has been considerably squeezed. Curbing inflation would now be the RBI’s priority, he presumed. Finance minister Pranab Mukherjee said steps were being planned to curb food prices and stressed on the need for more cold storages and institutional support.
The spurt in the wholesale price index (WPI) is the latest in a series of bad news for the economy that witnessed a slowdown in growth to 6.1% in the December quarter and a 3.5% contraction in industrial production in March following a slump in manufacturing, mining and capital goods output. It is now surmised that March quarter growth will be significantly slower than 6.9%, the average of three previous quarters.
The government has revised up the inflation figure for February to 7.36% from 6.95% estimated earlier, data released earlier by the industry ministry showed.
Prices of food articles rose 10.49% in April compared with 9.94% the previous month on soaring rates of vegetables and protein-based edible products. Prices of vegetables soared a whopping 60.97%, egg, meat and fish 17.54% and oil seeds 16.66%. Primary articles inflation, with a combined weight of 20.12% in the wholesale price index basket, surged 9.71% in April, compared with 9.62% in the previous month.
Similarly, manufactured products, with a weight of nearly 65%, inched up by 5.12% in the last month from 4.87% in March. Prices of edible oils shot up 11.10%, metals alloys and metal products 10.72% and iron and semis 17.98%. The fuel and power index gained 11.03% in April compared with 10.41% in the previous month.
Some analysts said underlying inflationary pressures despite a high base of 9.74% in April last year and softening real economic activity had raised fears of stagflation – a situation marked by high inflation, low growth and large-scale unemployment. Some others say the surge in prices reflects pressure from the weakening rupee and supply-side constraints rather than excess demand.
Even a possible let-up in imported inflation after the recent decline in crude oil price has been offset by the rupee’s fall. Rangarajan said the widening inflation rate differential betweenIndiaand developed countries is adding to the erosion of the rupee’s value. The rupee closed at another record low of 53.97 on Monday.
The benchmark Sensex shed 0.47% on Monday to close at 16,215 points, its lowest close since January 16, as investors hammered banking stocks apprehending the continuation of the tight monetary policy. The 2021 bonds yield dropped 4 basis points to 8.52% as hopes for continued bond purchases through open market operations brightened, while the five-year swap rate lost 3 bps at 7.48%.
Primary article prices have moved up in successive months since January when they rose 2.76%, while inflation in manufactured products moderated to 4.87% in March from the December level of 7.64% but inched up again last month. Fuel and power inflation, too, eased consistently from 14.98% in December to 10.41% in March before soaring again in April. The fresh surge in headline inflation, which showed signs of moderation since December after tripping 9% in each of the first 11 months of 2011, has again brought to the fore the difficult trade-off between growth and inflation.
“I don’t expect any further rate cuts this fiscal. The RBI will likely continue to infuse liquidity through cash reserve ratio cuts and open market operations. I expect average inflation to be 8% for this fiscal. With the rupee depreciating, manufacturing inflation will be a huge concern going forward and may rise to 7% to 7.5%,” said Sujan Hazra, chief economist at Anand Rathi Securities.
An 8% depreciation of the rupee against the dollar since March has pressured imports of key items such as crude and vegetable oil, and persistent concerns about the weakening currency have stoked fears of continued “imported inflation”. Moreover, the usual shrinking of supplies of fruits and vegetables during summer points at continued pressure on food prices in coming months.
The excise duty hike, volatility in global crude oil prices and possibility of a fuel price hike pose “upside risks to inflation” in the coming months, Arun Singh, senior economist at Dun & Bradstreet, adding that the central bank will wait for inflation in May before deciding on further rate cuts.
Analysts said the government’s inability to push through key reforms like easing foreign direct investment rules in multi-brand retail has reinforced the indispensability of structural reforms required to remove bottlenecks in improving supplies. These include creating vital infrastructure required to prevent losses of produce.
“The firming up of food prices, increase in indirect taxes and rupee depreciation, have also been contributing to inflationary pressures. This has made the Reserve Bank ofIndia’s task more difficult… The key upside risks to inflation are adjustment in fuel prices, and protein-led inflation,” said Rupa Rege Nitsure, chief economist at Bank Of Baroda. Economists said core inflation has not eased in line with expectation, although it hasn’t shot up irrationally either.
The RBI last month cut the main lending rate by an unexpectedly sharp 50 basis points for the first time in around three years to aid growth, but warned of limited scope to reduce rates further citing “upside risks” to inflation.
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