Inflation down, growth up. What stagflation?
The Reserve Bank of India (RBI) could sill raise interest rates going forward as the headline inflation number continues to stay above the 6% threshold of the central bank for the seventh consecutive month.
Data released on Friday may have finally put fears of stagflation to rest. The latest numbers from the National Statistical Office (NSO) show that while inflation seems to have peaked in April and has been easing since then, growth is beginning to gather momentum.
The Reserve Bank of India (RBI) could sill raise interest rates going forward as the headline inflation number continues to stay above the 6% threshold of the central bank for the seventh consecutive month. And some experts warn that the ongoing recovery might be bypassing the relatively underprivileged sections of the economy. But others point out that macro numbers haven’t looked this cheery in months.
India’s benchmark inflation rate, as measured by the Consumer Price Index (CPI) grew at 6.7% on an annual basis in the month of July. This is 30 basis points — one basis point is one hundredth of a percentage point — lower than the June print of 7% and 90 basis points below the April peak of 7.8%. To be sure, July was the seventh consecutive month when headline CPI reading was above 6%, which is the upper limit of RBI’s tolerance band under India’s inflation targeting framework.
The latest inflation number also confirms projections that the RBI is on course to miss its inflation target — defined as headline CPI staying above the below or above the target range of 2-6% for three consecutive quarters. The latest resolution of the Monetary Policy Committee (MPC) of the RBI projects that CPI will continue to stay above 6% until the quarter ending December .
Another key statistic released by NSO shows that industrial activity is finally gaining momentum — not just in comparison to a pandemic-driven low base but also pre-pandemic levels. The Index of Industrial Production (IIP), which measures activity levels for mining, electricity and manufacturing grew 12.3% in the month of June. While the June IIP growth print is lower than the May reading of 19.6%, a comparison with pre-pandemic levels shows that the situation in June is better than what it was in May with three-year growth rate figures being 1.7% for May and 6.7% for June. For manufacturing, the three-year growth number improved from a 1% contraction in May 2022 to 5.7% growth in June .
“Manufacturing output showed healthy growth in June and supported overall IIP activity. This reflects improving demand conditions and easing of supply-side challenges”, Dharmakirti Joshi, Chief Economist, CRISIL Ltd said in a note.
To be sure, the moderation in headline inflation number, should not be inferred as a broad based easing of prices in the Indian economy. For example, food inflation which has a share of 39% in the CPI basket, came down from 7.7% to 6.8% between June and July. However, core inflation — this excludes the food and fuel components of the CPI basket — remained unchanged at 6% in both months. The core inflation numbers, when read in the backdrop of extremely elevated wholesale prices — the Wholesale Price Index (WPI) has been above 15% in the quarter ending June 2022 — underlines the fact that inflation continues to be a serious problem for the economy. WPI data for July will be released next week.
Where the government and the RBI can draw some solace is the fact that household inflation expectations and crude petroleum prices have been coming down in the recent past.
Data from the ministry of petroleum shows that price of India’s crude oil basket (COB) has come below the psychological threshold of $100 per barrel in the month of August (data until August 11) for the first time since February. The latest MPC resolution has assumed an average COB price of $105 per barrel.
“Accounting for the available high-frequency prices and today’s data, we are currently tracking August inflation at 6.6% y/y. While RBI kept its forecast for FY 22-23 average inflation at 6.7% last week, to us, the risks are clearly biased towards inflation surprising the RBI’s forecasts on the downside. We continue to believe that CPI inflation will be back within the MPC’s target range (2%-6%) by Q4 22,” Rahul Bajoria, MD & Chief India Economist, Barclays said in a note.
As for growth, there is likely to be a moderation going forward, something acknowledged in the MPC’s quarterly GDP growth projections. “Strong export performance along with a gradual easing of supply headwinds is boosting industrial output. Still, we see scope for moderation going forward, as a combination of tighter domestic financial conditions, shrinking profits and rising input costs weigh on activity levels,” Bajoria added.
But questions remain about the unequal nature of the ongoing recovery. “While the improvement in IIP numbers is encouraging, it needs to be kept in mind that the informal sector of the economy, both firms and workers, might still be facing significant economic pain. A 6% plus inflation scenario is only adding to this pain and unless policy steps in to reverse the K-shaped recovery, the economy will not be able to achieve a sustainable high growth trajectory,” said Himanshu, associate professor of economics at Jawaharlal Nehru University.