India’s wholesale price inflation in July slowed to a 32-month low of 6.87%. This is the first sub-7% level of wholesale inflation since December 2009. There is another piece of good news as well on the inflation front—May inflation has been left unchanged at 7.55%. Typically, the revised figures are higher than the provisional ones.
The primary food price inflation eased a bit but the so-called core inflation—or non-food, non-fuel inflation—accelerated to 5.44% from 4.85% in June. Despite a slowing economy, core inflation is now at a five-month high. This, however, has not had any impact on the growing noise for a rate cut. After all, growth is slowing fast. India’s economic growth in the March quarter dropped to a nine-year low of 5.3%. This is 60 basis points (bps) lower than in March 2009, the quarter that had seen an unprecedented credit crunch across the globe in the wake of the US investment bank Lehman Brothers Holdings Inc.’s collapse; and almost four percentage points lower than the year-ago quarter. One basis point is one-hundredth of a percentage point. The 6.5% growth in fiscal 2012 has been the slowest growth in Asia’s third largest economy since 2003.
On Friday, the Prime Minister’s Economic Advisory Council projected a 6.7% growth for the Indian economy in the current fiscal. This is lower than the finance ministry’s February estimate of 7.6% (+/- 25 bps) but higher than many other estimates, including the Reserve Bank of India’s (RBI) 6.5%. Nonetheless, pressure will mount on the central bank to cut its policy rate although there is little space for the monetary policy to operate in the absence of any fiscal correction.
Indeed, RBI has failed to tame inflation, but it will be unfair to blame the central bank alone. Photo: Hemant Mishra
The business media—both pink and white papers, magazines and TV channels—have been dissecting the growth-inflation dynamics for years now; but there aren’t too many voices against high inflation while every industrial house and business lobby is screaming from the rooftops, giving vent to their frustrations on slowing growth.
Why hasn’t there been a single town hall meeting on high inflation that has been persistently eroding the value of money? In recent history, the first time the wholesale inflation in India touched double digits was in June 2008 (10.89%), and it remained high for the next six months till December. The impact of the global credit crunch and demand destruction was seen in low inflation figures between January and November 2009. Since then, it has been high, much beyond RBI’s comfort level.
Economic growth has been slowing in other emerging markets as well but the inflation level in those markets is far lower than in India. Why has India been an outlier? There are reasons, including the high wage inflation here, a high fiscal deficit and a high current account deficit.
One reason behind the high decibel noise on economic slowdown and the apparent indifference towards uncomfortably high inflation could be that growth is a concern for the affluent urban population while inflation hits the poor. A burgeoning middle class with disposable income cares less about inflation, and that’s why there is less noise.
There are other explanations as well. For instance, the job guarantee scheme for the rural poor under the Mahatma Gandhi National Rural Employment Guarantee Act that offers 100 days of employment in every fiscal to adult members of any rural household for public work-related unskilled manual work. Besides, the wages of those who are not covered by the scheme have been rising in rural India.
A senior journalist offers a different perspective for the unorganized labour in urban India. He has given his driver a 20% wage hike this year and, on top of that, he takes care of his driver’s medical emergencies. These act as a cushion against a rising inflation.
I am not entirely convinced by this argument as every employer is not as generous as him; but it’s somewhat puzzling why there hasn’t been any social unrest on high inflation. Is the massive decline of the Left in national politics a reason for this? Are the growing followers of Baba Ramdev and Anna Hazare a manifestation of the people’s unease with a rising inflation? Do we have to wait for the opposition parties to drum up the issue ahead of the 2014 elections? (One hopes the inflation genie is bottled up way ahead of that.)
Indeed, RBI has failed to tame inflation, but it will be unfair to blame the central bank alone. The government, too, cannot shun its responsibility. There is no quick fix but at least the new finance minister can make a beginning by withdrawing the subsidy for petroleum products. The February 2012 budget projected a Rs.40,000 crore subsidy for this. At that time, the price of crude per gallon was around $125, and a dollar equivalent was Rs.52. Now, the crude price for the Indian basket has come down to around $110 a barrel and the rupee has slipped to $55-56 a dollar. At the current rate, the subsidy works out to around Rs.1.8 trillion. If the government abolishes the subsidy, its effect on wholesale inflation will be 260 bps. So, the best way to go about it would be in two, or even three, stages over a few months. It’s a Hobson’s choice before the government. If it abolishes subsidy, inflation will rise; and if it doesn’t, fiscal deficit will increase and it will impact inflation.
For the long-term sustainability of low inflation, the subsidies must be withdrawn. Along with that, we need a definite road map for fiscal correction, both through higher tax collection and expenditure compression. And there should be a deafening noise on high inflation—an avoidable tax on the poor.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Email your comments to firstname.lastname@example.org