Inflation, inflation, inflation ? the bugbear refuses to go away.
The RBI raised its WPI estimate to 8% for March, up a percentage point since
its last estimate in January. Recall the first estimate for March end inflation
given last April was actually 5.5%, so even though inflation has declined over
the past year, the fall has not panned out as anticipated. This has largely
been due to inflation in primary articles, first in food articles and now in
non-food, and these pressures will continue.
Our other investigations show that price increases are spreading in
multifarious ways across the economy ? and perhaps more so in the unorganized
sector than in the organized one. Wages are rising for semi-skilled and skilled
workers far above the NREGA norms, growth in eastern India has reduced
availability of unskilled labour, real-estate prices are on the uptrend across
rural and small town India. Profitability will take a hit at least for the next
couple of quarters.
The recent up-tick in inflation in manufactured products is
therefore expected to continue over the next quarter to peak around 6-7% by
June and then stabilise about a percentage point lower by the year end. These
estimates of course depend critically on how fuel and commodity prices move.
Looking at the crude trend, the unrest in the Middle East has already pushed
prices up by around $15 a barrel and while it is acknowledged as a short term
phenomenon, it is not clear how long this ?short term? will last. China and
India have again been held to account for the rise in input prices with strong
growth. Both countries have upbeat reports from the PMI survey, which for March
shows continued flow of new orders, and more so in India. Both countries have
been raising rates at a moderate pace as growth has taken precedence over
inflation, but this stance could change by June - while inflation in China has
recently steadied, pressures continue to reign in India.
Over and above the inflation concerns are the growth concerns. What
is the central bank to do? This is a tough call for the RBI as over-reacting
would impact the growth sweet-spot that India is in. Our advice to the RBI
would therefore be to restrain itself in rate increases for the coming few
months even if international commodity inflation rises by a few percentage
points. To put it in another way, if the government does act by its promises in
the budget of reining in expenditures, increasing interest rates and tightening
liquidity can impact growth and growth expectations more adversely than in the
past, or is desirable.
There are other issues to address as well. If we look at the credit
side, the rate hikes so far have not dampened the spirit of consumers or
producers. According to the latest provisional RBI data for February, credit
flows in all segments, except agriculture have grown at a faster rate than the
previous year. Yet, there is cause for concern, unlike other segments, credit
to agriculture and SMEs are not gaining in growth. Clearly, structural issues
in access to credit continue to bog these two sectors down and this inequality
in access should be dealt with urgently. The point being made here is that we
should not be carried away by the 9+ growth path in India, a sustained growth
path with equitable distribution of benefits calls for more than just multiple
In other words, what is needed is more action from the government;
to take just two points, it would do well if it kick-starts the delayed mining
projects and enables inter-state agriculture trade. Moves like these will do
far more for growth and inflation in the long term and are already long
overdue. Welfare and financial inclusion initiatives may be well and good, but
they cannot by themselves get us to the impressive objectives we have set
P.S. Indicus is pleased to announce the launch of its Centre for Financial Inclusion, with support from the
Bill and Melinda Gates Foundation.