The Monetary Policy Committee (MPC) of the Reserve Bank of India finished its three-day long meeting on June 8. It has made an upward revision of one percentage point to its inflation forecast for 2022-23 – it is now expected to be 6.7% – and kept the growth projection unchanged at 7.2%. Given the challenging inflation environment, MPC announced a 50-basis point hike in the policy rate – one basis point is one hundredth of a percentage point – and
But the effect of fuel tax cuts on consumer demand is still unknown
Most people accept that India’s post-pandemic recovery was K-shaped, where a large part of the relatively non-rich – both firms and households – are still struggling. Because the non-rich have a higher propensity to consume and private final consumption expenditure (PFCE) accounts for almost 60% of India’s GDP, a widespread revival of consumer sentiment is essential for a sustained economic recovery. It is on this count thatRBI’s Consumer Confidence Surveys (CCS) still paint a sober picture. While consumer sentiment has been recovering, it still continues to be in thered and its pace of improvement has actually seen some sort of moderation between the March and May rounds. To be sure, there was no extension round survey ofCCS like the Household Inflation Expectation Survey, so whether or not fuel price cuts have had a positive impact is unknown.
{{^htLoading}} {{/htLoading}} Other high frequency indicators suggest inflationary headwinds to business confidence
If the results of the Purchasing Managers’ Indices (PMI) for the month of May are any indication, inflation is beginning to eat into business sentiment. “Business sentiment was dampened by inflation concerns in May, with the overall level of confidence the second-lowest in just over two years”, the PMI manufacturing release for the month of May said. PMI services results also echoed this sentiment. “Business confidence among private sector firms in India remained subdued in May, despite improving from April. Manufacturers and service providers were concerned that inflationary pressures would restrict output growth over the course of the coming 12 months”, the release said.
{{^htLoading}} {{/htLoading}} Crude oil price is going to be the key factor, going forward
If there’s one unknown regarding the economy at the moment, which everybody including MPC is trying to second-guess, it is the trajectory of crude petroleum prices going forward. This year’s Economic Survey assumed the average price of crude petroleum to be in the range of $70 to $75. The latest MPC resolution now expects the average price of India’s crude oil basket to be $105 per barrel, an upward revision to its April assumption of $100 per barrel. Whether or not this will materialise, given the uncertainties on both supply and demand side, is anybody’s guess. Data from the ministry of petroleum shows that the average price of India’s crude oil basket showed some moderation in the month of April, but has started rising once again after that. India’s crude oil basket was trading at $118 per barrel on June 7, as per data from the ministry of petroleum.
{{^htLoading}} {{/htLoading}} “At a conference in Jordan, UAE’s energy minister said the prospects for a jump in Chinese demand means prices could keep rising”, Bloomberg reported on June 8. “The amount of oil that producers can add to the market “is not very encouraging,” Suhail Al-Mazrouei added, underscoring concerns about spare production capacity in the oil market”, the story added.
{{^htLoading}} {{/htLoading}} If oil prices rise further, the only way to contain inflation could be to cut back taxes, which is why Governor Shaktikanta Das argued for state governments cutting taxes on petroleum products. However, with the period of guaranteed GST compensation to states coming to an end after June, the pressure on state finances is likely to increase, which will make such cuts more difficult.
