(Mint)
(Mint)

India’s la-la land of low inflation is turning a nightmare for policymakers

  • More than eight quarters of low inflation would mean the wheel of consumption is slowing rather dramatically now
  • Policymakers are now realizing that prolonged low inflation is as dangerous as a long-drawn high inflation episode

MUMBAI: India’s economy has had low inflation for months now, and policymakers are feeling rather uncomfortable with this state. Headline retail inflation, adopted by the central bank as its main anchor for policy, has been below the 4% target for nine straight months. Of course, retail inflation has picked up in the last three months, but the April print of 2.92% is on anticipated lines and still below 4%.

Policymakers are now realizing that prolonged low inflation is as dangerous as a long-drawn high inflation episode. To start with, low inflation is symptomatic of a demand slowdown. More than eight quarters of low inflation would mean the consumption wheel, which powered the India economy, is slowing rather dramatically now.

“The overall trend of declining core inflation since October 2018, when it was at 6.24%, has continued into the seventh consecutive month now, with the fall in urban-core more pronounced than the rural-core over this period. This easing of core inflation is a clear indication of weakening of consumer demand," notes Gaurav Kapur, chief economist at IndusInd Bank Ltd.

ndia’s economy has had low inflation for months now, and policymakers are feeling rather uncomfortable with this state. Headline retail inflation, adopted by the central bank as its main anchor for policy, has been below the 4% target for nine straight months. Of course, retail inflation has picked up in the last three months, but the April print of 2.92% is on anticipated lines and still below 4%.

Policymakers are now realizing that prolonged low inflation is as dangerous as a long-drawn high inflation episode. To start with, low inflation is symptomatic of a demand slowdown. More than eight quarters of low inflation would mean the consumption wheel, which powered the India economy, is slowing rather dramatically now.

“The overall trend of declining core inflation since October 2018, when it was at 6.24%, has continued into the seventh consecutive month now, with the fall in urban-core more pronounced than the rural-core over this period. This easing of core inflation is a clear indication of weakening of consumer demand," notes Gaurav Kapur, chief economist at IndusInd Bank Ltd.

Ergo, everyone from carmakers to biscuit bakers is losing pricing power. Analysts fear it would only worsen the already weak investment demand.

They are not alone. Chetan Ghate, a member of the Reserve Bank of India’s (RBI’s) monetary policy committee that votes on policy rates, had said that consumption demand drives investment demand and not vice versa, showed the minutes of the committee’s April policy meeting.

This puts in jeopardy RBI’s already lowered growth forecast of 7.2% for FY20.

Already, rural growth has slowed down owing to prolonged food disinflation that crimped farm incomes. With incomes reduced, the spending propensity of rural households has already dropped.

While food inflation has bounced back of late, for this to lead to increased farm income will take time. And then there is the monsoon, a key swing factor in farm output and hence rural incomes. The country is likely to receive only 93% rainfall of the long-period average, according to private weather forecaster Skymet.

Either way, the political response to food inflation would matter a lot. Both the government and RBI have realized that low inflation comes with a price and that is a slowdown in economic growth.

The central bank has already made noises about being accommodative towards growth by reducing policy rates. It remains to be seen how much of a fiscal space the new government will have to add to a monetary stimulus. For now, the anxiety over growth has only grown among policymakers.

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