Asharp rebound in economic activity strengthened India’s gross domestic product (GDP) growth in the second quarter of the year, but rising inflation could disrupt the recovery.
Data suggests that inflation is gradually rising in the country, though it remains within the Reserve Bank of India’s (RBI) target of 2-6 per cent. In October, retail inflation rose marginally to 4.48 per cent, but remained within the RBI’s target for four straight months.
However, there are chances that inflation accelerated sharply in November due to several factors, including rising vegetable prices, elevated fuel costs and rising input costs for companies.
A poll of economists conducted by news agency Reuters forecasts retail inflation anywhere between 4.50 per cent and 5.32 per cent in November. Official inflation data will be released on December 13 at 5:30 pm.
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WILL INFLATON DENT ECONOMIC RECOVERY?
One of the key factors why inflation probably witnessed a rise in November is the sharp rise in the prices of various vegetables. The jump in vegetable prices, though temporary, could hit demand and disrupt economic recovery for a short period.
“Last month’s reduction in fuel taxes and a slightly favourable statistical base were offset by strong momentum in the price of perishables,” said Yuvika Singhal, economist at QuantEco Research, told news agency Reuters.
While fuel prices have been cut by the government, it seems that fuel demand has fallen after the festive season. This indicates a lower demand for fuel. India’s fuel consumption in November was down 4 per cent on a quarterly basis and over 11 per cent lower year-on-year.
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However, economists remain upbeat about fuel demand in 2022, adding that demand will rise again as Covid-19 fades further. This, too, indicates that inflation is unlikely to impact economic recovery for a long period.
RISING INPUT COST BIGGEST WORRY
While vegetable prices and fuel demand may fade away over the next few months, India could face a period of persistently high inflation due to rising input costs.
Many companies across the spectrum from automakers to electronic goods manufacturers have hiked prices of their products due to prolonged disruption in global supply chains and severe shortage of semiconductors. Car manufacturers are already going for another round of price hikes in January 2022.
Madhavi Arora, lead economist at Emkay Global Financial Services, told Reuters that the rise in November inflation was also due to a hike in telecom tariffs, besides the other factors mentioned above.
Simply put, rising inflation in the non-food category, arising from global supply chain disruptions and fresh restrictions due to the new Omicron variant of coronavirus, seem to be the biggest hurdle in the path of swift economic recovery.
Global brokerage Nomura feels that India’s Consumer Price Index-based inflation may jump to 6 per cent early next year.
“Inflation is set to rebound to 6 per cent in early 2022, converging with elevated core inflation. We expect higher prices of food, core commodities and services to lead to a convergence of headline and core inflation at ~6 per cent over the next six months. We expect headline inflation to average 5.5 per cent YoY in 2022, from 5 per cent in 2021,” Nomura economists wrote in a note last month.