Inflation could get in the way of our economic recovery this year

Clearly, the human cost and burden on our health infrastructure this time is far more grave than during the peak of last year’s wave. Photo: Bloomberg
Clearly, the human cost and burden on our health infrastructure this time is far more grave than during the peak of last year’s wave. Photo: Bloomberg


Let’s loosen our fiscal reins to support a revival that faces significant price-rise and pandemic risks

India’s second wave of the covid pandemic is turning far more serious than imagined. New infections of coronavirus have now crossed 300,000 per day, with daily deaths above 2,000. Clearly, the human cost and burden on our health infrastructure this time is far more grave than during the peak of last year’s wave. However, unlike 2020, when the central government imposed a draconian lockdown for more than two months, this time the government has shied away from imposing a full lockdown. Even though state governments have imposed their own versions, these are less severe and restrictive than the national lockdown last year. With Prime Minister Narendra Modi making it clear that a national lockdown is unlikely to be an option, given its potential impact on the economy, in particular on lives and livelihoods, the economic damage may be less severe than last year.

Despite this, the economic consequences of the second wave are likely to be as bad, if not worse, than in 2020. It is likely that India’s economic recovery will be more painful than the revival of commercial activity after last year’s all-India lockdown, primarily because of the scale of the pandemic itself, which is much larger now. Also, unlike last year, when cases were rising gradually, these have reached alarming proportions in a very short period of time, testing the health infrastructure in many states. It is unfortunate that despite the warnings of experts that a second wave of greater severity was probable, preparations to deal with it fell acutely short. Moreover, the concentration of infections in economically-vital states—such as Maharashtra, Gujarat, Uttar Pradesh, Karnataka and Delhi—mean local restrictions that affect economic activity negatively, even without a national lockdown. The result of curbs is already visible in lost livelihoods and a second exodus of migrant workers from cities in these states. It can also lead to a hunger crisis, which must be attended to immediately.

Another factor that might make this year’s recovery difficult is the spectre of rising inflation. Despite the fact that our economy is yet to fully recover, and demand continues to remain low, the past three months have seen a consistent rise in price levels. Unlike previous episodes of inflation, this time it is only partly driven by rising domestic food prices. It is largely driven by a rise in core inflation. As predicted by the Reserve Bank of India, inflation could stay elevated for quite some time this year. Some of this is because of global commodity price trends, which have turned sharply upwards, of late. In March, the Food and Agriculture Organisation (FAO) food price index rose for its tenth consecutive month, with the index at its highest level since June 2014. This increase, driven by edible oils, meat and dairy products, is also reflected in domestic prices. While overall inflation has risen in the last three months on the back of urban price inflation, at 6.52% in March, overall retail inflation is also creeping up, with our March figure at 5.5%. As with the international trend, our cereal prices have declined along with a fall in fruit and vegetable inflation, but edible oil inflation is at 25% and pulses inflation at 13%.

With the economies of most other countries, including advanced nations, now on a recovery path, inflation is likely to remain high for the rest of the year, driven by international prices as well as domestic pressures. A general rise in primary commodity prices, as seen in international markets, will push up inflation in the Indian economy, thus complicating a recovery. With petroleum prices also remaining high, along with a weakening rupee, fiscal and monetary policy management could come under considerable strain.

While the spectre of rising inflation poses obvious problems for economic management, it is also likely to impact the hunger and malnutrition situation in the country. With jobs squeezed, waves of migrants returning to their villages, and the consequent decline in economic activity, we are back to a situation where the pandemic can combine with inflation to create a humanitarian crisis. But this is also a time for the Centre to let go of fiscal prudence and transfer as much resources as possible to states, not just in cash, but also in kind.

With foodgrain stocks at 77 million tonnes, as on 1 April, as against the buffer requirement of 21 million tonnes, the government should expand and extend its scheme for dispensing extra food through the Public Distribution System. With the next round of procurement underway, this is not only feasible, but also desirable. What is important at this juncture is to protect the economy, but also to prevent covid from creating yet another humanitarian crisis.

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