Dealing with inflation
Inflation data for October shows that prices have started gaining momentum once again. Retail inflation, as measured by the Consumer Price Index (CPI), grew 4.5% on an annual basis in October. This is slightly higher than the 4.3% growth in September and marks a reversal of the falling trajectory of headline CPI since June . Wholesale prices, as measured by the Wholesale Price Index (WPI) grew at 12.7% in October, making it the seventh consecutive month of double-digit inflation. While the cut in petrol-diesel taxes might provide some relief on the CPI front, this is not going to be enough to bring it down significantly. WPI, with tailwinds from international commodity prices, especially crude oil, is likely to stay elevated. To be sure, there are some signs that the worst of international commodity price inflation is over. The Bloomberg Commodity Index, for example, has been flat for the last couple of weeks.
Disruption in international value chains, however, is not the only source of inflation in India at the moment. Taxes on petrol-diesel are still way above pre-pandemic levels, and fuel inflation will continue to matter. Then, there is the question of companies passing on a greater share of the increased costs to consumers as demand recovers. This is likely to be a factor in both goods as well as services inflation. Another potential upset on the inflation front could come from a fall in crop yields in the rabi (winter) season as farmers are finding it difficult to procure adequate fertilisers in various parts of the country.
This brings up the question of policy response. The Reserve Bank of India is expected to continue its gradual re-manoeuvring towards a normalisation of monetary policy, first on the liquidity and then on the interest rate front. The forthcoming budget will almost coincide with the next election cycle, which will also include the critical state of Uttar Pradesh. It is to be expected that the Centre and incumbent state governments will loosen their purse strings as elections come closer. This will hopefully provide some cushion to demand in the country. It needs to be underlined that a lot of the inflation talk — around microchips and associated gadgets and cars — does not really concern the demand of the poor in India. Unless international prices start rising at a faster rate, restoring broad-based growth is the most important policy challenge in India. The approach to inflation should also be driven by this concern — inflation should not hurt the poor — rather than managing the headline number.