After hitting an 8-year high of 7.79% in April this year, inflation has peaked but will still take time before coming below the 6% level, feel economists and experts. In a survey of 13 economists and policy advisors conducted by Times of India Online, a majority of the experts said that inflation will come within RBI’s comfort zone of 2-6% only by the next financial year.
Are global factors the major contributors of inflation in India? How is inflation in India vs other major global economies? The Times of India Online Survey takes a deeper insight into what is driving inflation in India, when it is likely to come down and what else needs to be done on the monetary and fiscal front.
Drivers of CPI: India importing inflation
Majority of the economists surveyed by TOI Online are of the view that India is importing inflation due to global supply chain disruptions and crude oil shocks. RBI’s Monetary Policy Report for September 2022 also stated that the trajectory of CPI has been hit by the Russia-Ukraine war.
During March-August 2022, goods inflation contributed 86% of headline inflation. Perishables as semi-perishable goods along with cereals and medicines were the main drivers of goods inflation, the RBI report says.
Contribution of Goods and Services to CPI Inflation
Food and beverages inflation (with a weight of 45.9% in CPI) rose to over 8% in April 2022, owing to global supply shortages and adverse domestic weather conditions. Thereafter, food inflation eased but picked up again in August with cereals and vegetables being its key drivers.
CPI fuel inflation surged above 11% on the back of sharp increases in LPG and subsidised kerosene prices which, in turn, reflected the sharp jump in global energy prices following the conflict in Ukraine. Fuel inflation has now moderated due to decline in kerosene prices.
It is also important to note that the headline CPI inflation was already testing the upper tolerance threshold of 6% during January-February 2022, due to adverse base effects, and a sticky core component.
According to Ranen Banerjee, Partner and Leader Economic Advisory Services India’s inflation is being highly influenced by imported inflation as our imports are large. Banerjee explains that unlike the global economies, the monetary interventions to tackle inflation in India are not to impact the demand (though there is a collateral damage there!).
“The monetary intervention is forced to maintain the interest rate differential between US/other developed economies and India for addressing any significant impacts on the exchange rate from adverse capital flows that leads to more imported inflation by way of costlier imports in Rupee terms,” he told TOI while responding to the survey.
Contribution of imported inflation
As evident in the chart, increase in global commodity prices due to war contributed to a surge in the contribution of imported components to headline inflation during March-June 2022. Subsequently, the decline in international commodity prices in July-August 2022 lowered imported inflation.
RBI has also noted that higher global inflation and global interest rates impact capital flows, put downward pressures on the domestic currency and lead to higher imported inflation.
Madan Sabnavis, Chief Economist at Bank of Baroda states that inflation is being driven by food prices which are affected by supplies and manufactured inflation where companies are still in the process of passing on their higher input costs to the consumer. Services too are passing on higher cost of inputs (power, labour, rent etc.) he tells TOI.
India vs Advanced Economies
The International Monetary Fund (IMF) has projected global inflation to rise from 4.7% in 2021 to 8.8% in 2022. In fact, CPI inflation in advanced economies is expected to reach unprecedented high levels.
According to the RBI report, inflation ratcheted up across economies due to sustained cost push pressures from elevated food and energy prices, rising wage cost and lingering pandemic-induced supply chain bottlenecks as strong rebound in domestic demand in a number of economies added to price pressures.
This has led to central banks across economies to tighten monetary policy aggressively. In India too, the RBI has raised the key policy repo rate by 190 basis so far this year.
However, RBI governor Shaktikanta Das in his September policy statement said that India is better placed than other economies. “The extraordinary global circumstances that caused the heightened inflationary pressures have impacted both AEs and EMEs. India is, however, better placed than many of these economies,” he said.
Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services points out that although India’s inflation is likely to average ~7% or 1.75x of the medium-term target, it is much lower than extremely high inflation in advanced economies, running at 3x-4x of the target.
Dharmakirti Joshi, Chief Economist at CRISIL notes that in India, inflation is not only lower but also more supply driven than some of the advanced countries. Agrees, Sachchidanand Shukla, Chief Economist of Mahindra Group, who adds unlike in India, an advanced economy like the US is seeing a more demand led inflation surge.
DK Srivastava, Chief Policy Advisor, EY says that most of global as well as Indian inflation is rooted in supply side disruptions and cost push factors. The RBI is constantly monitoring the movement of inflation and raising the repo rate, he notes. “It is simultaneously attending to objectives of containing inflation while minimizing the adverse impact on exchange rate and growth rate,” he adds.
CPI Inflation: When will it come below 6%?
An economist at a prominent housing finance company said that the inflation trajectory will largely depend on how the Russia–Ukraine war pans out. “The inflation will start coming down once the war ends. That will be the turning point,” the economist said.
Dr Rupa Rege Nitsure, Group Chief Economist at L&T Financial Services sees inflation coming below 6% in FY24. This, she says, will be driven by easing of global commodity prices (including Brent crude prices) and food prices. A favourable statistical base effect will also bring down headline inflation she says, adding that there will be a lagged impact of RBI’s monetary tightening as well.
A leading economist at an industry body feels that if there are no new price shocks, CPI inflation should come down below 6% in March 2023. “The weight of the food basket is very high in India at almost 50%. A revision in the base year from the current base of 2012 may throw up new weights for the individual baskets,” the economist says.
Incidentally, an SBI Ecowrap report in September also said that the CPI basket has not changed since 2012 and this has also possibly resulted in overstating CPI inflation at multiple times.
Dr Arun Singh, Global Chief Economist at Dun & Bradstreet doesn’t see an easy road ahead for inflation to come down. “CPI will come down below 6% by early FY25 as energy prices are expected to remain elevated and supply strains owing to geopolitical risk will keep prices of essential commodities elevated,” he says.
“Energy and food both contribute to more than 52% of headline inflation. Given the dependence of agriculture on monsoon and need to import more than 80% of oil, India’s inflation dynamics is subject to vagaries of the monsoon and geopolitical events impacting oil movement,” he substantiates.
According to the RBI report, CPI inflation will come within the target range only gradually. “The outlook is, however, fraught with considerable uncertainties, given the highly volatile geopolitical situation, spillovers from the elevated global financial market volatility and recurring adverse climatic conditions,” the report cautions.
What more can be done to bring down inflation?
Sabnavis of Bank of Baroda is of the view that monetary intervention is only part of the solution. “We need fiscal intervention through lower taxes to bring it down. This is not just petrol and diesel but also GST on goods and services,” he says.
Shukla of Mahindra Group advocates use of fiscal measures to supplement the monetary policy. “The government has in the past reduced import duty on edible oils, regulated the import and export of certain commodities and duties on petrol and diesel have been brought down,” he says. “These steps have been judiciously used, so some of these can be relooked to control inflation again. Also, gold imports have been surging in quantum, that is another area that the government can act on the fiscal side,” he adds.
On the other hand, Nitsure of L&T Financial Services believes that even if the current inflation is caused by the supply shocks, monetary policy will be effective in controlling it with a lag.
The broad-based consensus amongst economists is that despite adverse global headwinds, the Indian economy is better placed and resilient. With several world economies staring at recession and high inflation, there is little doubt that the RBI and the government have a tough task of maintaining India’s growth while keeping inflation under check.