Active Stocks
Tue Mar 05 2024 13:11:36
  1. Tata Motors share price
  2. 1,025.00 3.83%
  1. Tata Steel share price
  2. 152.15 -0.62%
  1. Titan Company share price
  2. 3,736.00 0.11%
  1. State Bank Of India share price
  2. 785.60 1.74%
  1. ITC share price
  2. 407.10 -0.49%
Business News/ News / India/  Why inflation stands in the way of India’s growth recovery

Why inflation stands in the way of India’s growth recovery

Even as growth risks recede, risks to inflation remain. This will complicate the task of the monetary policy committee (MPC) of the Reserve Bank of India (RBI) which meets this week to decide policy rates

Graphic MintPremium
Graphic Mint

The promise of a quick vaccine, India’s higher-than-expected gross domestic product (GDP) numbers for the Sep-ended quarter, and a booming stock market suggest that the risks to growth may be declining. But there is one big hurdle still: persistently high inflation. And it may well pose the biggest threat to the country’s nascent economic recovery.

Inflation has been hovering above the Reserve Bank of India’s (RBI’s) target range of 2-6% throughout this year. So far, RBI’s monetary policy committee (MPC) members have chosen to tolerate the inflationary spike even as they kept monetary policy loose to revive growth. As the MPC meets again to decide on policy rates this week, unrelenting inflation may test their tolerance.

In a rare comment just days ahead of the MPC meet, Mridul Saggar, an MPC member and a senior RBI official said that high inflation leaves little room for the MPC to cut rates now. He was speaking at the Emerging Markets Central Banking Summit organized virtually by the Washington-based Institute of International Finance last week.

To be sure, many economists expect inflation to cool in the coming months. As food prices come down because of a bountiful harvest and supply chains disrupted by the pandemic get repaired, inflation will no longer be as big a risk as it is now, they say. But they have been reading the inflation tea leaves wrong for the past several months. Since April, most economists have maintained that high inflation will be ‘transitory’. Yet, it has assumed a permanence throughout the year, driven largely by high food prices.

Saggar pleaded helplessness in the battle against food prices, saying that the MPC lacks the fire-power to tackle food prices. Yet, food prices can play a role in forming inflation expectations and thereby end up influencing the headline inflation numbers by driving up wages and costs. In fact, this was precisely the reason cited by the Urjit Patel committee to target headline inflation in its report on inflation targeting in 2014.

Household inflation expectations have indeed remained elevated since April, RBI’s survey data shows.

It is worth noting that the actual trajectory of inflation has often differed from the inflation expectations data. Some economists also suggest that household inflation expectations may be heavily influenced by current inflation rates. Nonetheless, the persistence of inflation can harden inflationary expectations and make it even harder to tame in future.

The global environment has been benign so far but the tide may be turning. Easy money has already boosted stock prices globally, as stock markets find themselves awash with liquidity. As prospects of a global recovery improve, commodity markets could also find themselves inundated with fresh liquidity in the coming months. The sharper the global recovery, the higher the chances of a commodities boom.

For India, a net importer of commodities such as crude oil, this could become a challenge, said Anubhuti Sahay, head of South Asia research at Standard Chartered Bank Plc. Compared to key emerging economy peers, India is much more vulnerable to a rise in global oil prices.

Sahay also said that policy-driven price pressures, such as hikes in excise duty on various fuel products, are unlikely to reverse any time soon and will remain a challenge going forward.

There are also long-term demographic changes globally that may bring the era of low inflation to an end, warns a new book by the economists Charles Goodhart and Manoj Pradhan, The Great Demographic Reversal.

Governments globally would need to spend increasingly more money to support ageing populations. This would add to fiscal stress and push up inflation. A declining labour force also means more consumers than producers, adding to inflationary pressures. Strains on globalization and the growing mistrust of China might fragment supply chains and add to these price pressures, Goodhart and Pradhan argue.

Moreover, as the labour force shrinks and globalization weakens, workers would gain more market power, and be able to bargain for higher wages. These forces would all conspire to bring an end to a long era of low global inflation, the authors argue. For countries such as India that have struggled to tame inflation even in a benign global environment, the prognosis appears frightening.

Low growth, rising government debt, and unrelenting domestic inflation have already created an unfavourable situation ahead of the MPC meet. The prospects of an inflationary spiral globally only adds to the growing list of inflationary threats.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Check all the latest action on Budget 2024 here. Download The Mint News App to get Daily Market Updates.
More Less
Published: 30 Nov 2020, 12:40 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App