Ahead of 2019, Inflation Data Reveals Modi Govt’s Policy Myopia

If potato, guava prices rise at wholesale mandis, it won’t be long before your colony sabziwallah hikes his rates.

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(Photo: iStock / Altered by The Quint) 

In June, India saw prices shoot up at a rate not seen in almost five years. Wholesale prices shot up by 5.8 percent in June from a year ago, from a relatively benign 4.4 percent a month prior. Wholesale prices invariably seep into your pocket. Wholesale price inflation (WPI) translates into consumer or retail prices (CPI) hikes.

If potato, guava or coconut prices go up sharply at the wholesale mandi, it won’t be too long before your neighbourhood sabziwallah (grocer) hikes his rates.

Move Towards Plastic Money Will Hit Consumption

An option is to substitute these with tapioca, karela (bitter gourd), black til (or niger seeds), jackfruit, and beans whose prices are said to have fallen, but food is food and recipes are recipes. Most of us will find it tough to cook aloo-dum as jackfruit-dum and even harder to make guests or kids eat it. Karela, anyway, is a tough sell.

Anyway, the June jump is sharp and unexpected. Brokerages polled by data aggregators like Bloomberg and Reuters reckoned a hike of 5.2 percent as likely, before the official number was released. Now, analysts are scratching their heads to figure out what this number might mean for policy, politics and people.

The Reserve Bank of India (RBI) implements monetary policy in India. It is now widely expected to hike interest rates to cool rising prices in its end-July policy statement. In theory, a hike in interest rates sucks cash out of consumption into savings.

With less money chasing the same goods, inflation falls. In reality, things are not so simple.

An interest rate cut takes months to translate into a fall in money in circulation. So, this is unlikely to be an immediate Band-Aid for food or fuel prices, which might have shot up because of a poor harvest or a shock in global oil markets. This is why policymakers now distinguish between ‘non-core’, ‘core’ and ‘headline’ inflation.

The last is the broad number, 5.8 percent today, for WPI. Non-core inflation is the part contributed to this number by food and fuel price hikes. The RBI and monetary policy is supposed to have little or no impact on this part of rising prices. What it can influence, however, is the remainder – core inflation – prices of manufactures, lending rates, machinery, wages, transport, infrastructure and so on. But how far does this distinction work today?

My hypothesis: very little.

A very large, and growing shift – egged on, ironically, by the Narendra Modi government – towards plastic, and away from cash, will immediately hit consumption.

Not of fruits and vegetables, but of much ranging from books and jeans to smartphones, laptops and washing machines.

Monetary Policy Can Cool Underlying Inflation

Many now pay for this with cards, and this sarkar’s policy of effectively hiking transaction charges on plastic by shifting from a service tax regime to a 64 percent higher GST regime was bound to dent online and discounted buying.

Add to this a rate hike and a giant retail movement where almost everything from fresh fish to fruit can be ordered online, you have the recipe of a perfect consumption disaster. Higher taxes hike online rates; higher interest rates will add another insult to folks paying by credit cards. Businesses that discount heavily will soon be out of business.

The policy distinction between core and non-core has broken down. Today’s inflation is a complex mix of short- and long-term shocks.

The biggest contributor to inflation is oil and fuels, driven by the Trump administration’s hardline stance against Iran. That is supposed to be non-core and immune to policy action.

It’s not. This regime has consistently milked all of us for higher fuel taxes. Even when global oil was at a low USD 40 per barrel, we were paying higher pump rates than when crude was at USD 120 per barrel. Go figure.

Alas – electricity, metals and manufacturing rates – core inflation, subject to policy – have also shot up. Monetary policy might not affect global crude or potato prices, but it can cool underlying inflation here.

Is the Inflation Tolerable?

But politicians know inflation is a vote-killer. This is election season: later this year and January 2019, Rajasthan, Madhya Pradesh, Chhattisgarh and Mizoram will elect state governments. Apart from Mizoram, all other states are ruled by the BJP.

An upset will be regarded as a signal of how India will vote in Parliamentary elections in summer, 2019. State results are likely to nudge voter sentiments one way or other. The sarkar is supposed to know this. Does it?

Modi and his Finance Ministry have been slow on the uptake.

Contradictory and often disastrous on policy, such as when Modi demonetised 86 percent of India’s currency by value in a single evening, 8 November 2016, triggered a national crisis.

Industry, struggling for nearly five years and the financial sector, fighting a giant bad loan debacle face terrific odds to climb out of the mess. They will argue a hike in rates will hurt the slim growth prospects at hand. Rate hikes will hurt investment as well as consumption.

Meanwhile, a sarkar thrashing around clueless, has hiked minimum support prices that will benefit less than 2 percent of all crop growers. Modi & Co is signalling that inflation is tolerable, effective taxation will be high and targeted sops will continue. This is no good for consumer, producer or investor.

(The writer is a Delhi-based senior journalist. He can be reached @AbheekBarman. This is an opinion piece and the views expressed above are the author’s own.The Quint neither endorses nor is responsible for the same.) )