Inflation has hit a 17-month high. Disaggregated data for March Consumer Price Index shows nearly a dozen commodity groups including clothing, milk, vegetables, and personal care, surging to multi-month highs, suggesting inflation is turning structural with easing fuel prices unlikely to temper the trend.
But the runaway prices have not adversely impacted political outcomes, given the results of recent state elections.
Analysts point to multiple factors at play. One, inflation in food — where the price sensitivity of the households is the highest — wasn’t on the boil until the last few months.
Two, subsidised food supplies to most vulnerable families provided them a cushion. Three, though inflation has been moderately high, it hasn’t remained elevated for a long period. Four, the general tolerance level to inflation in India is seen as higher than in other countries.
And finally, the political Opposition may have flagged price rise but has stopped short of offering tangible solutions. Indeed, when it comes to fuel prices, for example, Opposition-ruled states haven’t been rushing in to cut duties – given its revenue implications.
The lack of noise, however, is cold comfort.
What’s worrying the government’s economic managers is the rise in wages due to rising food prices, which will have a spill-over effect on wholesale inflation.
An unprecedented revision in essential medicine prices from April 2022 and the cascading secondary impact of fuel prices is only expected to intensify the process of inflation turning structural.
“It is largely going to be a concern around food prices; food is the overwhelming component in the inflation index at about 45 per cent of the basket. While the other components of clothing and footwear have shown high inflation in the last 2-3 prints, food is where the price sensitivity of households is the highest. High food prices bite consumers the most,” says Rahul Bajoria, Chief Economist, Barclays.
Apart from seasonal factors, food prices have surged with the pass-through effect of high fuel prices and a likely higher consumption in rural areas where workers migrated during the pandemic.
“In terms of production, nothing dramatic has happened. The issue of supply chains has also been pretty much straightened out. So where is it coming from? One possible answer is, post-pandemic and after the lockdowns, there has been an urban-to-rural flight of people…So, the number of people in the villages has probably gone up relative to pre-pandemic time. This has essentially led to more food being consumed in villages, which are at the points of production. There may actually have been a reduction in the surplus coming to the market,” says Pronab Sen, former Chief Statistician of India.
High inflation may not be showing much impact on the political economy as the poor seem to have been protected by the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), which has now been extended till September 2022.
Referring to this, State Bank of India’s Group Chief Economic Adviser Soumya Kanti Ghosh says, “Free food grains is one of the reasons. The second reason is that inflation often happens in select commodities such as tomato, onion, potato, which leads to agitation. But this time, most articles in most consumption baskets have seen inflation. Also, inflation is high in items such as edible oils, palm oils; petrol and diesel prices are also high. I don’t know if politics is divorced from economics. Too early to say since inflation has been largely under control apart from the two years after the pandemic.”
Under the PMGKAY scheme, 5 kg of food grains (wheat, rice, coarse grain) is provided to each beneficiary each month free of cost. About 80 crore beneficiaries are covered by the scheme and the quantity provided is over and above their entitlements under the National Food Security Act.
Unlike in India, high inflation in developed countries also follows a huge fiscal expansion. “You had that initial kick that came through whatever repressed demand it was, but that is for a very small segment of society. Most other people drew down their savings. So, if you look at what’s been happening in India, consumption was moderated. It’s only started recovering a little bit now. And that’s when inflation has started kicking in,” Sen said.
Experts note that with the pandemic affecting MSMEs on a larger scale, the pricing power rests more with the corporates now. A prolonged Russia-Ukraine conflict is also expected to add to the already elevated price levels of commodities.
“The second order effects of fuel prices will be largely felt through public transport and logistics costs; it will be felt through the airlines, railways, and passenger fares. The secondary effects will show if a service becomes expensive, it will be a function of wage costs going up. The second order pass-through in services tends to be smaller as far as energy prices are concerned,” Bajoria says.
According to rating agency Crisil, the Russia-Ukraine crisis has amplified the cost pressures and supply disruptions across the world and for India, the impact will be predominantly felt through high crude oil prices.
“Core inflation is expected to face pressure from companies passing on costs to retail prices to a greater extent next fiscal. Food inflation is likely to remain benign on account of normal monsoon, though rising fertiliser costs and international food prices could add some upside,” it said in a February note.
During the first nine months of the current fiscal, urban inflation at 5.5 per cent was 50 basis points (bps) higher than rural inflation and it is the urban poor (bottom 20 per cent) that faced the highest inflation, at 5.6 per cent, according to Crisil. This is because fuel, with the highest inflation, has a larger share in consumption for the bottom 20 per cent than other income classes in urban areas.
Meanwhile, inflation for producers – measured by the Wholesale Price Index (WPI) – has been in double digits this financial year and scaled a record high in November, led by the low base of fiscal 2021 and sharp increase in commodity prices.
On the food price front, according to the RBI, a likely record rabi harvest would help keep domestic prices of cereals and pulses in check. Global factors such as the loss of wheat supply from the Black Sea region and the unprecedented high international prices of wheat could, however, put a floor under domestic wheat prices while edible oil price pressures are likely to remain elevated in the near-term due to export restrictions by key producers as well as loss of supply from the Black Sea region.
Also, feed cost pressures could continue due to global supply shortages, which could have a spillover impact on poultry, milk, and dairy product prices. And among the non-food items, the spike in international crude oil prices since end-February poses substantial upside risk to inflation through both direct and indirect effects.
“Inflation is likely to rise from two factors: last year, at this time price growth was negative for items such as cereals, so the low base effect will push inflation higher. Market supplies are dwindling marginally for food items such as wheat. Exporters are selling wheat in the global market taking advantage of the Russia-Ukraine conflict. If this can be checked or controlled by the government, it will have an impact not only on the wheat prices but also the food subsidies,” Devendra Pant, Chief Economist, India Ratings said.
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