Apart from the current inflationary scenario, India also faces the risk of heatwaves that could impact food production and prices
India's consumer price index or retail inflation has decreased by eight basis points in February to 6.44 per cent from 6.52 per cent in January. The retail inflation, which the Reserve Bank of India tracks for its monetary policy, has remained above the central bank’s tolerance level of six per cent for the second month leading to worries of another hike in policy rates.
The RBI-led Monetary Policy Committee (MPC) had hiked the repo rate by 250 basis points or 2.50 per cent since May 2022 to fight stubborn inflation, which resulted in policy rate rising from a historic low of four per cent in May 2022 to 6.5 per cent in February 2023.
Analysts believe that the stubborn inflation could force RBI governor Shaktikanta Das-led MPC to increase the repo rate by another 25 basis points when it meets again in April, even though global monetary authorities appear to give a pause to their tighter monetary policies.
Though the repo rate hikes could lead to higher borrowing costs and dampen entrepreneurial spirits, the government is unlikely to force MPC to pick growth over inflation, especially in the wake of the high-voltage election season this year and the general election next year.
While inflation is a byproduct of economic growth and developing economies invariably have higher tolerance to inflation, the Narendra Modi government is unlikely to let it have a free run because its ills would reach the poor faster than the benefits of growth.
Apart from the current inflationary scenario, India also faces the risk of heatwaves that could impact food production and prices.
The current inflation figure is more concerning because it was driven by some key components. The price of cereals, for example, has risen by a humongous 16.73 per cent. Milk and related products have become costlier by 9.65 per cent, fruits 6.38 per cent, spices 20.20 per cent, prepared meals, snacks and sweets 7.98 per cent, clothing 8.79 per cent, fuel and light 9.90 per cent, household goods and services 7.35 per cent, health 6.5 per cent, education 5.62 per cent and personal care and effects 9.43 per cent.
These are the goods and services that are essential for people and could directly affect their discretionary spending. If people’s discretionary spending shrinks, they would cut down on other big ticket expenditures like buying consumer durable goods and houses, adversely affecting the overall growth scenario for industry and investment climate.
Recently, Prime Minister Narendra Modi had implored Indian companies to loosen their purse strings and invest liberally to boost the country’s economy. For an entrepreneur, the primary motive for business would be his profit, while what is good for the country is merely incidental. There are several studies which suggest that the middle class, especially its lower rungs, has not recovered from the adverse economic impact of the Covid pandemic and their contribution to the country’s economic growth has plummeted to historic lows. Therefore, the government, apart from fighting inflation, should also focus on putting more money in the hands of the aspirational middle class, because no ruling party can survive its disenchantment.