Policymakers in a quandary as inflation looks far from ebbing2 min read . Updated: 01 Dec 2020, 07:49 AM IST
- High inflation is likely to outweigh other concerns in the Reserve Bank’s upcoming policy meeting
Rekha Jadhav, 52, a vegetable vendor in Navi Mumbai’s Kharghar, used to make ₹7,000 a day till last December. This, she says, has dwindled to around ₹4,000 now.
Vegetable prices, says Jadhav, have gone up; so her sourcing from the Vashi agricultural produce market has declined, and so has her sales volume.
High inflation has reduced disposable income for people, as they pay more to buy the same set of goods and services.
On a month-on-month basis, vegetable prices rose 1.8% to 22.5% in October from September, partly due to supply-led disruptions and crop damage due to excessive rains in some parts of the country.
Under the food segment, the increase in prices of vegetables and proteins kept inflation elevated. Inflation in meat and fish (18.7%), eggs (21.8%), oils and fats (15.2%), vegetables (22.5%), pulses (18.3%) and spices (11.2%) remained in double digits.
“Inflation is not expected to come off meaningfully in the coming months, aside from the impact of the base effect, and an eventual normalization in vegetable prices. With demand strengthening and some households having greater visibility on their income outlook, inflation expectations are expected to remain high," said Aditi Nayar, principal economist, ICRA Ltd.
India’s retail inflation based on the Consumer Price Index (CPI) hit a nearly six-and-a-half-year high of 7.6% in October, with food inflation registering a steep rise. Throughout the year, inflation has remained over the 6% mark, the upper end of RBI’s inflation target of 2-6%.
Mint reported on Monday that the central bank is expected to keep key policy rates unchanged when it next meets on 2-4 December to review monetary policy, as per a survey of 10 economists. According to the survey findings, while economic recovery will continue to remain the cornerstone of the central bank’s monetary policy focus for the foreseeable future, high inflation, which has hovered at the 6% mark, will likely outweigh other concerns in the upcoming policy review.
Supply side disruptions, prolonged monsoons and crop damage in the Deccan area continued to exert upward pressure on food articles.
“Given that consumption is so critical for revival of Indian economy (with a 55% share in the GDP) and that the pandemic has resulted in job losses and income destruction, high inflation is the last thing households want," said Crisil Research in a 13 November note.
In fiscal 2020, private final consumption expenditure (PFCE) stood at ₹123 trillion. If it is assumed that retail inflation goes up by 1 percentage point, overall private final consumption expenditure increases by ₹1.23 trillion to consume the same basket of goods and services.
Similarly, one percentage point increase in food inflation pushes up the food bill by ₹0.33 trillion.
Given their budget/income constraint, households tend to slow down consumption of non-essentials when prices rise fast.
“For November, vegetable prices have started to ease, which is likely to temper headline CPI in the month, and more in December when base effects will be more acute. However, incipient price pressures in other non-food segments, namely telecom, general services, commodities etc., are likely to stay sticky, slowing the pace of correction in headline CPI," said Radhika Rao, economist, DBS Bank.
Thus, the current scenario of income loss and higher inflation does not augur well for sustained consumption revival in the economy.
“Consumption spend this year is already suppressed, particularly in the services sector, given pandemic-related anxieties," added Crisil.