High inflation challenge

Kashmir Times. Dated: 1/17/2020 5:45:08 PM

The NDA-government must spell out plans for reviving growth as it has limited fiscal space as inflation goes up

High inflation rate, particularly food articles and essential commodities, is posing a serious challenge to the NDA-government as it has a limited fiscal space in the days to come. The challenge becomes complicated when the food prices are at all time high and there is no room for improve with market intervention mechanism, from the government to provide some respite to the common masses. The latest inflation data seems to corroborate fears articulated by the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) in its December meeting when it refrained from cutting the benchmark repo rate for advancing of loans to the consumers. The retail inflation as measured by the Consumer Price Index (CPI) has gone up to 7.35 percent in the month of December, up from 5.54 percent in November as per the data released by the National Statistics Office (NSO). The policy rates are unlikely to be changed in the months to come in view of the fact that the inflation has been higher and even surpassed the RBI's target of containing it at 6 percent last month. This may be true in the second half of the current financial year and it reduces the chances of easing the policy rate as the policy planning of the government continues to be uncertain in the last quarter of the fiscal year. It is unfortunate that inflation continues to rule the roost when the government has very little to offer to its people when the ten-year growth sector yield is on the lower side and has reacted sharply to these developments and further impacting the high inflation rate. The credit inflow in the markets has also remained low with consumers on the edge when the earning level has gone down impacting their purchasing power that in turn hit the borrowing from the financial institutions. This combination of weak economic activity and higher than expected supply-side inflationary pressures has put the inflation-targeting regime under test.
Most part of the rise in inflation number can be traced to higher food prices. Food inflation has risen to a near six-year high of 14.12 percent in December 2019, up from 10.01 percent in the previous month. Much of this spurt is due to vegetable prices, which have surged to 60.5 percent in December, contributing nearly 3.7 percentage points to the headline numbers. Prior to this NSO data, there was an argument for overlooking this spurt in food prices, and easing rates further, as this spike in inflation is likely to be transitory. But the price rise has been more pronounced in the past two months. And while vegetable crop cycles tend to be short, and supply-side pressures may ease in the coming months, the stickiness in prices of protein items is likely to provide a floor for food inflation. When put differently, food inflation is unlikely to revert to previous levels in the short term in near future. And as household inflation expectations, a key metric in the MPC's assessment, are more responsive to food inflation, this uptick will further exert upward pressure on them. Coupled with this, the uncertainty over oil prices on account of hostilities in the Middle East, and the outlook for inflation looks muddled. The petroleum prices, which impact energy needs of the people, continue to a cause of worry, with energy security mechanism causing uncertainty. It was expected that the MPC would lower rates further once clarity over the centre's financial position emerges after the Union budget. But the current trends in inflation suggest that those expectations are likely to be hit badly. Space for further easing may now open up only towards the second half of the next fiscal year. Soon, attention will turn to the Union budget. With limited fiscal space for a meaningful stimulus, the Union Finance Minister should spell out how the NDA-government intends to support the economy during this rough patch, and return growth to a higher trajectory.

 

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