By Dr. Gyan Pathak
With a prospect of India’s economic growth rate to decelerate from 7 per cent in 2022-23 to about 5.5 per cent with further downside risks, reigning in inflation in the country seems to be difficult in 2023-24 or beyond amidst global uncertainties and economic downturn.
The Reserve Bank of India (RBI) household survey has seen retail inflation as remaining elevated throughout the year, and now an HSBC analysis has concluded the same. The headline retail inflation in India, which had steadily eased over the last quarter of 2022 from September’s five-month high of 7.4 per cent quickened by 80 basis points in January to 6.5 per cent, has actually contradicted the claim of Reserve Bank of India Governor Shaktikanta Das made just five days ago that inflation ‘has shown signs of moderation and the worst is behind us.”
On February 13, the data released by the government showed that the retail inflation had shot up again beyond RBI’s tolerable limit of 6 per cent to 6.52 per cent in January. It had gone down below 6 per cent in previous two months. In December 2022, it was 5.72 per cent, and it was expected to remain low in January 2023. However, it betrayed everyone’s expectations. Propelling the acceleration was a 175 basis-points jump in food prices, with inflation measured by the Consumer Food Price Index, quickening to 5.94%, from December’s 4.19%.
The RBI household survey has also found that the rise in inflation was primarily due to the rise in food inflation. Not only that, the RBI’s survey on inflation expectations, released after the monetary policy on February 8, has said that the retail inflation is expected to remain elevated in the next one year with an all-round rise in prices across the board.
The RBI survey says that among consumption categories, the proportion of respondents perceiving price rise was highest for the food group for both the horizons, as also witnessed in the previous two survey rounds. As per the survey, inflation expectation of household has risen by 10 bps from 10.4 per cent in November to 10.5 per cent in January for the period three-month ahead.
Now economists at the HSBC Securities and Capital Markets (India) has been reported saying that the Indian economy could see another bout of inflation. They have pointed out the rising food inflation as a major cause, adding that food prices will likely remain elevated, as we await the winter crop due in March/April.
“Even if the winter crop is good, the rural demand it stokes will come in the way of disinflation as producers continue to restore margins, pressuring core inflation” the HSBC note says, adding “if the winter crop is weak due to last-minute weather disruptions, food inflation could remain high, even if incomes and core inflation fall.”
The economists at HSBC believe that the present rise in inflation has to do with the recovery in rural and informal sector demand due to rise in income during post-pandemic economic recovery from the pandemic-lows.
HSBC’s research shows that the rural demand was weak in the early part of the last year and wage growth adjusted for inflation has now surpassed pre-pandemic levels. Moreover, sowing of winter crops has been strong which should help rise in rural income as well as the income of the people engaged in informal sector which is closely linked to rural economy. It would put inflation up.
“Already, there is pressure on food inflation, particularly across cereal and milk,” the HSBC note stated.
It is also worth noting that the annual rate of fodder inflation based on all-India Wholesale Price Index (WPI) numbers has further increased to 29.30 per cent in January 2023 against 28.66 per cent recorded in December 2022. It is the chief cause of hike in milk price, and the WPI-based milk inflation reached a nine-year high of 8.95 per cent in January 2023. It also shows the miseries of our livestock.
With inflation seen at an average of 5.4 per cent in 2023-24, HSBC expects RBI to even raise the policy rate by another 25 basis points from the current 6.5 per cent level.
It would certainly be a difficult decision for RBI, since it would fuel further rise in interest rate marking tightening of financial conditions which in turn make investment costly and putting brake of deceleration of Indian economy much more difficult.
RBI has been trying to reign in high inflation for quite some time, but the January inflation at 6.5 per cent shows that all their efforts have failed in keeping it below its tolerable limit of 6 per cent. Inflation continues to hurt and will continue to hurt at least for next one year is almost certain.
The domestic and global market conditions indicate that inflation will be even harder to bring down than the expectations of the market, where investors are betting on good times with hope of considerable fall in inflation rates and the consequent cut in interest rates. Many of them are optimistic that the world may avoid recession, but it is still uncertain. Even if it happens, one could think considerable cut in interest rates only by the end of 2023, that too in most favourable conditions. Presently, the world faces further interest rate hikes that would also impact the Indian economy. (IPA Service)