Inflation Trends in India

Official data on retail food and fuel costs remain the main driver. Inflation continues to accelerate and output at the country’s factories contracted for a second straight month.

• While inflation quickened to a four-month high of 5.52% in March, as per provisional data from the National Statistical Office, the NSO’s quick estimates of the Index of Industrial Production for February show output including at mines, the manufacturing sector and electricity generators shrank 3.6%, following on from January’s 0.9% contraction.

Food and Fuel Costs

• Consumer Price Index numbers show that stubbornly high food and fuel costs remain the main drivers of price pressures.

1. Pulses and edible oils, key kitchen staples and vital nutritional sources for proteins and fats, have been climbing almost dizzyingly for the last few months, a fact not lost on the RBI.
2. While inflation in pulses accelerated to 13.3%, from 12.5% in February, oils and fats saw a more than 400 basis points surge to 24.9%.
3. In its policy statement this month, the central bank hoped that arrivals from the rabi harvest as well as imports would likely augment supply, helping moderate the prices of pulses.
4. Similarly, on edible oils, the RBI is rather optimistically banking on the government to cut import duties and offer incentives to boost domestic production to counter the heightened inflation.
5. With meat and fish, and eggs yet again posting double-digit increases, inflation in the food and beverages category quickened almost 100 basis points to 5.24%.

Transport And Communication

• Disconcertingly, transport and communication also saw a more than 100 basis points acceleration t
• o 12.6%, and this despite the pump prices of petroproducts remaining virtually frozen through the month, ahead of the March 27 start of Assembly elections.
• The most plausible explanation is that the freight and urban transport sectors saw a lagged pass-through of the preceding months’ steep increases in automobile fuel costs.
• Price pressures are unlikely to ease significantly in the near term, unless the Centre and the States bite the bullet by agreeing to forego some near-term revenue from petroproducts and reduce fuel taxes.
• The RBI, which has been stridently seeking a reduction in these levies, foresees inflation averaging 5.2% in the April-June quarter.

Mining, Manufacturing

• Separately, the IIP data shows mining continuing to backslide, manufacturing struggling for traction with an output of capital goods, construction gear and consumer non-durables all contracting in February.

Policymakers face tough choices in trying to nurse back demand- Reducing Taxes, Easing Interest rates etc., And they must do this without letting quickening inflation undermine purchasing power and overall economic stability.

Inflation trends in India

• India’s retail inflation decelerated appreciably to 4.59% in December, from 6.93% in November, dipping below 6% for the first time since March 2020 as food prices cooled. Other data released by the National Statistical Office (NSO) on Tuesday, however, showed that a nascent industrial recovery, which had begun in September, retreated in November as industrial output shrank 1.9%.
• The lowest consumer price inflation (CPI) print in 14 months was driven by an sharp slowdown in food price inflation, which eased to 3.4% in December, from the preceding month’s 9.5% .
• India’s index of industrial production (IIP) for November was dragged lower by mining and manufacturing, which both shrank, as per quick estimates. Mining output contracted 7.3% in the month, while manufacturing declined 1.7%, indicating an unwinding of inventory build-ups with the quenching of pent-up and festive demand.
• Electricity production grew for the third month in a row, rising 3.5% year-on-year. The NSO also revised upwards the index for the preceding three months by incorporating more production data. As per the final data for August 2020, the IIP had shrunk 7.1% in the month, narrower than the 8% estimated earlier.
• In September, industrial output had edged up 0.5% — higher than the 0.2% growth estimated earlier — after shrinking for six months. Industrial output grew 4.19% in October, higher than the 3.6% quick estimate.
• “The November data once again shows that the uptick witnessed in the month of September and October was due to a combination of festive and pent-up demand and the recovery is still shallow and fragile,” said Sunil Kumar Sinha, principal economist at India Ratings & Research. “The unevenness and fragility of the current recovery is evident with only 10 out of 23 industry group showing positive growth in November,” he pointed out.

Inflation surprise

• Vegetable prices witnessed a 10.4% deflation in December, compared with inflation of 15.5% inflation in November. An accompanying moderation in the inflation rates for meat and fish, eggs and pulses, helped the consumer food price index record its slowest pace of increase in 16 months at 3.4%.
• Core inflation too eased marginally to 5.5% in December, helping overall inflation moderate after having remained above the central bank’s tolerance band for price gains — of plus or minus two percentage points from its medium-term target of 4% — for a prolonged period.
• “While the considerable softening in the CPI in December 2020 offers welcome relief, it is unlikely to prove adequate to allow for rates to be eased in the upcoming policy review, as the headline inflation may only record a limited further decline before resuming an uptrend,” said Aditi Nayar, principal economist at ICRA.
• Initial data for this month also suggest a continued plunge in vegetable prices, but point to a broad-based rise in prices of other food items, especially edible oils, Ms. Nayar observed. “Additionally, the hardening prices of crude oil, and its partial transmission into domestic retail prices, remain a concern,” she added.