Retail Inflation In India Had Worsened During The Month Of June – Why?

As of June 2020, retail inflation for consumers – based on the Consumer Price Index (CPI) – steeply climbed to 6.09%. In comparison, the retail inflation as of March 2020 was at a relatively low 5.84%. Due to inadequate data collection, the government had not permitted the release of numbers pertaining to headline inflation attributed to the months of April and May. In lieu of the two-month lockdown, the collection of data had been restricted to food inflation, which had led to inadequate data availability.

A Reuters economists’ poll had predicted the moderation of India’s retail inflation to 5.3%, from the revised 5.84% rate in March. This poll had been held from the 3rd to the 8th of July, 2020, and the median poll of over thirty-five economists had concluded in the country’s retail inflation breaching the Reserve Bank of India’s medium-term target of 4% by an excess of 1.3%. Yet, the latest data released by the government comes as a shock as India’s consumer inflation rates skyrocketed to 6.09% during the month of June. Despite the overall worse big picture, food inflation had plummeted by a large margin, falling from 9.2% in the month of May to 7.87% in June.

The Ministry of Statistics, in its official release, also acknowledged unavailability of data for several sub-groups during the months of April and May, 2020, and had addressed that the National Statistical Office had undertaken a separate exercise based on input about imputation methods recommended in Business Continuity Guidelines. The note has been published as a CPI Technical Note on Imputation.

While the government may not have mentioned the headline numbers for the sub-groups excluding food items for the months of April and May, the weighted index numbers had been computed by the government and had not been published in percentage terms.

The Reuters Poll:

Had the consensus of a 5.3% retail inflation rate been realized, it would have been the lowest Indian markets have seen since November 2019, albeit exceeding the RBI mandate of a medium-term 4% for the ninth month consecutively. Hugo Erken, head of international economics at Rabobank, had quoted that drops in inflation are caused by marked increases in economic activity that had halted early in the lockdown phase, and has been recovering in a slow manner ever since restrictions were eased or lifted.

According to a June 4 to June 9 poll of 35 economists, the consumer price index was predicted to rise to 5.5% in the month of May, compared to a year ago. The latest official comparable figure was from March 2020, due to government statistics for April headline data not being published in lieu of lockdown restrictions. As they had forecasted, the headline data for the month of May had not been released either. An economist at ANZ, Rini Sen had quoted that food prices would be the biggest risk in the market, but material jump in inflation owing to the lift of the lockdown will not be seen – rising unemployment numbers also suggest that demand-pull inflation will continue to be low.

The state of the economy:

A decline in price pressure could be helpful to the Reserve Bank of India, in lieu of the decrease in its repo rate by 115 points ever since the beginning of the lockdown. This had facilitated the organization to stay on its accommodative path and ease policies further.

The nation’s industry outputs contracted by 37.8% during the month of May 2020, in comparison to its output rates a year earlier. This has been the sharpest recorded fall of the country’s industrial economy since current calculations. Outputs have taken multiple hits by failing infrastructure output, which accounts for 40% of total industry production. In comparison, infrastructure output has contracted an annual 23.4% in the month of May 2020.

The month of May had the RBI relying upon alternative surveys and in-house forecasting models to “make sense of the price trends” and also finalize upon interest rates. This was largely due to the missing inflation data for the month of April, after the NSO failed to publish a complete set of data for retail and wholesale prices – they had stated the pandemic and nationwide lockdown had hindered their ability to conduct all the required fieldwork for its surveys. While food price details were available, headline inflation rates were not. The chief economist at ICICI Primary Dealership Ltd., Mumbai, A. Prasanna, had stated that the available data on food prices can be used to amenably model core inflation. “In terms of forecasting one-year ahead [sic] inflation, they should still be able to arrive at their decisions – whoever, confidence bands around these forecasts could be unusually wide.”

Secondary reports and studies:

Abhishek Gupta of Bloomberg Economics had published an estimated headline inflation rate timeline using the data reported by the statistics office. Along with an assumption of no monthly change in non-reported categories, the month of April’s headline inflation rate stood at 5.9% – a slight increase from the previous month’s 5.8%. This had been attributed to increased food-price growth, which had climbed to 8.6% during April, while comprising the bulk of the consumer price basket. In hindsight, this data estimation sits very well with the headline inflation timeline rate, at the rate for the month of June had risen to 6.09% instead of backing down as forecasted.

The Indian Institute of Management, Ahmedabad (IIM-A) conducted a survey that showed a sharp jump in one-year ahead business inflation expectations. The climb had steepened to 4.57% in March 2020 from 3.85%in February 2020. This had been the highest recorded since the creation of the survey task in May 2017. Price pressure build-ups have also been denoted clearly by the cost perceptions data. Despite signs of increased inflation, the RBI’s policy may be focused on the worsening growth outlook, rather than targeting inflation specifically. With the PM announcing a USD 265 billion care package to support the economy, small businesses and farmers have taken the center stage at such a time for the economy. As said by Teresa John, an economist at Nirmal Bang Equities Pvt., factors other than Consumer Price Index and Wholesale Price Index had taken precedence, with policy makers taking a forward-looking view for the time being. “If the inflation trajectory does not pan out as expected, then they will be more cautious in the months ahead”, she reported.

An economical conclusion:

With the lockdown expected to last until the end of July, an economic restart is expected during the month of August. This extension is expected to have a deep impact on economic activity, with India’s GDP forecast for this financial year sharply cut by a contraction of 2%. Analysts at the Bank of America Securities had stated that this had been forecast with the lockdown continuing until the end of July. While some analysts have pegged the contraction of the Indian economy as large as 5%, the Reserve Bank of India has not given a number to it.

With the Central Government reopening parts of the economy over periods of time, the lockdown is still being continued in the affected parts of the nation, which accounts for over sixty percent of economic contribution to the nation. With every month costing the country’s GDP 1-2% in contraction, a six-week economic restart may be as expensive as a 0.6% contraction in the GDP. Should the lack of vaccines force the government to continue the lockdown, the economy may contract by a larger percentage. With higher fiscal spending being the need of the hour, the widening fiscal deficit is also attributed to lower tax collections across India.

Despite such bleak situations at hand, the national economy is expected to recover, given time. With a pro-active economy post-COVID being expected by all consumers, deficits are expected to close faster with the growth of GDP expected to grow at a slower rate than initially assumed.

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