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17-month high inflation set to hurt India’s consumption recovery – Moneycontrol

Representational image.

Retail inflation at a 17-month-high spells bad news for the already pinched wallets of Indians, forcing them to rethink their plans of spending in the coming months, which in turn jeopardises the nascent recovery in private consumption expenditure.

Retail inflation rose to 6.95 percent in March, driven by a surge in food inflation and persistently elevated fuel prices. Economists point out that inflation is now getting broad-based. That means it is hitting household budgets from every corner.

Since the coronavirus pandemic hit in early 2020, private final consumption expenditure has remained under pressure owing to localised lockdowns amid multiple waves of COVID-19.

Note that consumption expenditure contributes to more than half of gross domestic product (GDP). This share, too, has come down with the concurrent increase in government spending due to the pandemic.

For Q3FY22, private consumption expenditure grew by 7.03 percent, lower than gross capital formation for the fourth consecutive quarter. Of course, growth numbers hide the statistical noise due to the deep contraction in Q1FY21 that was marked by the most stringent lockdown. Even so, India’s spenders are not back in force as yet.

Also read: March inflation shocker: Street sees early and more rate hikes

Progress arrested?

Consumption demand picked up as restrictions were lifted progressively over the past year. With most services, including international travel, now open, Indians have begun to get back to discretionary spending.

The latest consumer sentiment survey of the Reserve Bank of India (RBI) shows Indians are more optimistic now than before about their discretionary spending.

The 15 percent year-on-year surge in incremental credit card swipes is another indicator that consumers are even using credit to fund their desires. Anecdotal reports of a spike in aviation passenger traffic, holiday packages and other recreational spending underscore the recovery.

In fact, Nomura economists point to the rise in core inflation as a sign that a rise in demand is pulling up prices. “A deep dive into the core inflation basket suggests that firms are increasingly passing on higher input cost to consumers, and services that are reopening are also charging higher prices,” they said in a note dated April 13.

The fact that firms are passing on input costs shows that they are reasonably confident of demand. What remains to be seen is the point at which consumers begin to baulk at spending again.

The spike in inflation comes at an unfortunate time as Indians seem willing to get back to their pre-pandemic spending but at the same time face a steep cost. Again, the RBI’s consumer sentiment survey shows Indians are most pessimistic about inflation even though they want to increase their discretionary spending.

Also read: Retail inflation shoots up to 6.95% in March. Will MPC go for a rate hike in June?

No boost to the wallet

Inflation hurts less if income rises to compensate. Inflation along with low growth is a double whammy for consumption.

Worryingly, India’s inflation surge comes along with pressure on its economic growth. The RBI has pruned its GDP growth projection for FY23 to 7.2 percent. It expects growth to slow every quarter to reach 4 percent in Q4FY23.

In other words, the outlook on incomes and employment is not uplifting yet. This worsens the situation for consumers and by extension puts pressure on future consumption.

To be sure, the rise in prices of grains and cereals is good news for rural incomes. That said, food also has a high share in rural households’ spending.

Also read: Inflation spike drives 10-year bond yields to fresh 3-year peak at 7.2%

Shubhada Rao, the founder of independent research firm QuantEco Research, points out that it is unclear whether the potential income increase is enough to offset the impact of food inflation on rural households. “More empirical research is needed here. The government’s free food-grain programme could be masking the actual impact of inflation,” she said.

Savings during pandemic months could somewhat support spending in urban households but the sustainability of the same is unclear. 

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