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Business News/ Politics / Policy/  Retail inflation may fall to 5-5.5% next year: Economic Survey
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Retail inflation may fall to 5-5.5% next year: Economic Survey

Economic Survey also forecasts economic growth of 8.1-8.5%, faster than the 7.4% projected in 2014-15

Photo: Ramesh Pathania/Mint (Ramesh Pathania/Mint)Premium
Photo: Ramesh Pathania/Mint
(Ramesh Pathania/Mint)

New Delhi: Retail inflation may fall to 5-5.5% in 2015-16 on cooling oil prices, weak global demand and increased farm production, providing relief to both the people and the government, according to the Economic Survey tabled in Parliament on Friday.

This is lower than the Reserve Bank of India’s (RBI) estimate of 6% retail inflation by January next year.

The survey, released a day ahead of finance minister Arun Jaitley’s first full budget, has forecast economic growth to rise to 8.1-8.5% under new calculations. The forecast marks an acceleration of growth from the 7.4% projected in 2014-15.

“Consumer price inflation (CPI), which is likely to print at 6.5% for 2014-15, is likely to decline further. Our estimate for 2015-16 is for CPI inflation to be in 5-5.5% range and for the GDP (gross domestic product) deflator to be in the 2.8-3% range," the survey said. “The implication is that the economy will over-perform on inflation, which would clear the path for further monetary policy easing."

An expert agreed with the survey’s prediction.

“I would think that the Economic Survey’s inflation projection of 5%-5.5% (which is an average for 2015-16 ) is realistic," said Shubhada Rao, chief economist at private sector Yes Bank Ltd. “Our own projection is 5.5%."

The downward shift in the inflationary trend has been caused mainly by falling global commodity prices, especially crude oil, edible oils and coal. Domestic factors included a decline in the growth rate of rural wages and moderation in the increase in minimum support prices for crops, which the government pays to farmers for procurement.

“These are simultaneously being reflected in dramatically improved household inflation expectations," the survey said. “The economy is likely to over-perform on RBI’s inflation target by about 0.5-1 percentage point, opening up space for further monetary policy easing."

Crude oil prices are expected to remain benign in the near future and will be about 29% lower in 2015-16 compared with 2014-15—$59 versus $82. “Global demand will remain soft because of slow growth in major areas of the world economy, including China and Europe," the survey said.

Besides oil, price rises will be shaped by pressures from agriculture, and developments on the foreign and domestic fronts. “Moderation in wage rate growth reduced demand pressures on protein-based items," the survey said. If the fall in wage growth persists in the next year, it would help further moderate inflation, it added.

Inflation is not expected to rise significantly from current levels despite the risk of international crude oil prices bottoming out, and the lower acreage in oilseeds and pulses during the current rabi (spring) harvesting season that could create supply pressure and capacity constraints in warehousing and cold storage, the survey said in its outlook section.

“The government and RBI need to conclude the monetary policy framework agreement to consolidate the recent gains in inflation control and codify into an institutional arrangement what has become the de facto practice," the survey suggested. “This would signal that both government and RBI jointly share the objectives of low and stable inflation."

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Published: 28 Feb 2015, 12:51 AM IST
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