Are we in the midst of dreaded stagflation? Following the release of December retail inflation data on Monday, 13 January, commentators have begun to use the dreaded word yet again to describe the condition our economy is in. And they are not off the mark this time. The danger now is real than ever before.
While the retail inflation touched a level not seen in the last five years, the nominal growth at just 7.5 percent is at the lowest level since 1978.
What these two number indicate that the real growth is close to zero. In some states, Odisha and Uttar Pradesh, for instance, the retail inflation is close to 9 percent.
In other words, the real income for the people living in those states fell in December compared to what was the case last year.
Impact of Higher Food Prices More Pronounced Among Poor Households
The internals of the inflation number show that the prices of vegetables spiked by a whopping 60 percent in December, that of onion by mind boggling 300 percent, the prices of pulses by 15 percent and the entire food basket by nearly 14 percent.
NSSO survey data suggests that poor households spend a bulk of their income on food items. Rich households, on the other hand, spend only a fraction of their income on food items. Sudden spike in the prices of food article therefore hits the poor households the hardest.
No Respite in Sight Just Yet
With the hike in railway fares across all categories, prices of petrol-diesel inching up and palm oil import banned, any respite in inflation is unlikely in near future. What is even more worrying is the fact that sudden spike here coincides with hardening of food prices globally.
According to an Indian Express report, Food Agricultural Organisation’s (FAO) Food Price Index in December was 27 percent more than what was the case in January 2016. What it means is that we run the risk of importing higher food inflation in case we are made to import some items.
Now that we have embarked on a much higher inflation trajectory which seems likely in near future, two immediate consequences are bound to follow:
1. RBI IN PAUSE MODE
The Reserve Bank of India’s Monetary Policy Committee has a mandate to keep the inflation in the 2 to 6 percent band. With the current inflation reading breaching the band on the upside, the committee may find it extremely hard to cut rates.
What is worse, if the current trend persists for a longer period, the RBI may be compelled to reverse its easing cycle and may even contemplate a hike. And that is going to be a terrible news for an economy that is struggling to stay afloat.
What the inflation number unfortunately has ensured that the RBI is going to be in a pause mode for a considerable period.
2. A FISCALLY PRUDENT BUDGET COMING
There has been speculation that the government can let loose the purse string and pump prime the economy by going on an investment drive.
That means abandoning the fiscal prudence at least for some time. The current inflation reading may force a rethink on the part of the government.
With an inflation reading which is as ugly as this one, the government may desist from borrowing a whole lot from the market. That is yet another factor that is likely to impact a swift recovery as and when it happens.
The inflation reading that we have got now is partly because of supply side disruption. A case in point is sudden spike in prices of onion. Not only did we mismanage the supply, we placed orders to import onions quite late. As a result, the imported assignment reached us when fresh crop is about to hit the market.
What happens if there is additional pressure on inflation from the demand side too as and when economic recovery gets underway? There will be additional upward pressure on inflation, forcing the RBI to initiate a tightening cycle.
That will be a terrible news. Is there any plan on the horizon to take us out of the stagflation mess?
(Mayank Mishra is a senior journalist who writes on Indian economy and politics, and their intersection. He tweets at @Mayankprem. This is an opinion piece and the views expressed in this article are that of the writer’s own. The Quint neither endorses nor is responsible for the same.)
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