Food inflation is a hot potato for Modi government
Tuesday brought in both good and bad news for the economy. On the positive side was the uptick in the IIP (Index for Industrial Production) for May, which rose at the fastest pace in the past three months. However, separate data showed retail inflation continued to rise, and was high at 5.77 per cent in June. Let us examine inflation first.
Food inflation came in at a 10 month high, with increase in prices of cereals, pulses, vegetables and sugar being the major contributors. However, prices of pulses have seen moderation, from 32 per cent in May to 27 per cent in June.
Inflation is a hot potato for the government, pun intended. One of the major planks on which the Modi government differed with RBI governor Raghuram Rajan was his hawkish position on controlling inflation, and his decision to target the high retail inflation as opposed to wholesale inflation, which is much lower.
The jury is still out as to which of those should be ideally targeted, and there is a section of experts who argue that RBI should shift its attention from targeting inflation altogether and focus on growth instead.
The other worry is that high inflation can be as much a rallying point for the general public as the lack of any real growth in jobs is. High food prices are already a reason for agitations in several parts of the country. In Maharashtra, consumers are in for a double whammy.
On top of the already high prices of vegetables is a strike by a section of traders. These traders are up in arms against the state government's decision to amend the APMC (Agricultural Produce market Committee) Act, 1963, thereby deregulating the sale of vegetables and fruits to help farmers get a fair price for their produce.
 |
| Food inflation came in at a 10 month high, with increase in prices of cereals, pulses, vegetables and sugar being the major contributors. |
Prices of vegetables and fruits have skyrocketed in Mumbai, despite a call from the government to traders to get back to work. Even a minister in the Devendra Fadnavis govenrment, Sadabhau Khot, took to selling vegetables at the Dadar market on Tuesday in symbolic defiance of the ongoing strike by the traders. But it hasn’t cut much ice with the traders.
At the national level, prices of vegetables continue to increase, rising 14.74 per cent in May compared to 10.77 per cent a year ago. The reason for this could be the damage to crops on the account of the heat wave experienced in some parts of the country before the onset of monsoons. Sugar prices, meanwhile jumped 16.79 per cent in June from 13.96 per cent a year ago.
Although, the pickup in monsoon has eased concerns about crop output and food inflation, retail inflation is likely to be under pressure in the near term (till August -September), says a Care Ratings report.
That would mean that the RBI would be in no hurry to lower interest rates any soon. Some expect the central bank to cut rates by 25 basis points only towards the end of the calendar year.
Meanwhile, IIP for May surprised on the upside, and rose 1.2 per cent compared to a decline of -0.8 per cent in April. Some analysts say that the impact of government action on the infrastructure front is beginning to show. But private investments have remained lacklustre, without which there is going to be no significant uptick in industrial output.
Care Ratings says that the consumer goods segment would do well, with the increased pay hikes following the implementation of 7th Pay Commission and favourable monsoons that could trigger the rural as well as urban demand for consumer goods.
There was a sequential improvement in capital expenditure, but analysts from HSBC Global Research feel it is not enough evidence that the capex cycle had turned the corner. It came on the back of two months of sequential contraction, so could just be some temporary consolidation along the way.
Moreover, public investment, the only engine of capex that is running, has been subdued so far in the year, and over April and May, central government capex contracted nine per cent year on year, compared to a 47 per cent expansion in fiscal 2016.
Inflation and poor private investment will remain big challenges for the government. All eyes are now on the rest of the July month, which will see the announcement of a new RBI Governor and the progress of the monsoon as it pans out across the subcontinent.