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It has been about two weeks since I arrived in Chennai. What I picked up in these two weeks is that Indian households are cautious and circumspect. They are weary from lockdowns and the shock of covid’s second wave. They are worried about a third wave, even though outside of Kerala, the pandemic is a ripple right now in India. Hence, there is no appetite to engage in big-ticket spending.

While anecdotal information and data can always be overstated because they are personal, they reinforce what we can see in aggregate data. Only when they clash must one give greater weight to aggregate data rather than one’s personal experience, which always has too small a sample.

These sentiments were evident in the consumer confidence survey published by the Reserve Bank of India (RBI) before its last monetary policy meeting of 6 August. That survey made for grim reading.

Improved perceptions on employment prospects one year ahead seem more a case of hope than any reasonable prognosis. The survey’s Table 5 makes for sad reading. Expectations on income for the near-term have worsened, from -50 in May to -59 in July. Table 8 is even worse. Expectations of spending on non-essential items have worsened not only for the present but also one year from now.

Given that government tax revenues are doing far better than expected or budgeted in the first quarter of the current fiscal year 2021-22, some people may put two and two together and argue that private-sector distress (high fuel taxes) is the cause of relatively robust public-sector finances.

High fuel prices are reflected in the inflation expectations of the public. With respect to the price expectations of Indian households, the RBI survey’s most important table is Table 5 (b). It shows the distribution of inflation expectations—a matrix that has both perceptions of the current inflation rate and what people expect one year ahead of price levels. The survey is an outcome of polling 5,963 urban households. Table 5(b) is revealing.

Those who think that the current inflation rate is high expect the one-year ahead inflation rate to be as high or higher. Check out the row pertaining to the current inflation rate perception of around 10% to 11%. Of a total of 1,180 respondents who think that the current inflation rate they are experiencing is between 10% and 11%, about 996 of them think that future inflation would be the same or higher. Of those who think that the current inflation rate is 16% or more—and that is 1,506 of them—about 1,224 expect the one-year ahead inflation rate to be 16% or more.

In the final analysis, what matters is that a big chunk of the surveyed households think that their current inflation rate is 10% to 11% (1,180 of them) or above 16% (1,506). That is 45%. As many as 736 households think that the one-year ahead inflation rate will be 10% to 11% and 1,837 of them think that it will be above 16%. That is 43%.

What is funny is that about 796 of RBI’s surveyed households expect the future inflation rate to be less than 1%. That is a big 13.3% of the survey’s participants.

There is a problem with the inflation expectations survey of Indian households. RBI needs to examine it closely and improve it, if it must serve as a useful policy guide, and it should because it is the raison d’être of India’s monetary policy framework. Maybe the questions need to be framed better or more simply for survey participants to understand. It is difficult to believe that 13.3% think that the one-year ahead inflation rate will be 1% or less.

In sum, households do perceive an inflation problem, and this has indeed been the case. Indian inflation expectations are very sticky. Inflation targeting or not, this hasn’t changed. One of the claimed benefits of inflation-targeting is that it anchors inflation expectations at a low and stable level. In the case of India, this has not happened at all. In January 2021, I wrote that India’s inflation is a regulatory and not monetary phenomenon. So far, I have had no occasion or reason to alter my view.

However, none of this is necessarily cause for despair on the economic front. Financial conditions are accommodative. The country’s impaired financial system has largely been repaired. Top companies are reporting healthy profits. Foreign investment interest on India is high. Hence, the outlook for capital expenditure on the part of the private sector is bright. But wait. What about final demand?

Let us rewind the tape and look at growth rates in real private final consumption expenditure in the six years between 1997-98 and 2002-03. In three of the six years, it was just around 3%. One of them was 2002-03. Yet, in the following five years, India witnessed a credit and investment boom. So, it is not necessarily the case that weak demand conditions would hold back capital expenditure. An investment boom can create a virtuous cycle of supply and demand. If India puts the fear of a third wave behind it, then the economy may experience a partial repeat of the 2003-08 boom. Our challenge will be to sustain it without suffering a credit bust.

V. Anantha Nageswaran is a member of the Economic Advisory Council to the Prime Minister. These are the author’s personal views.

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