It is exactly after eight years that the Wholesale Price Inflation (WPI) has climbed to 7.39% in March 2021. Before this, in March 2013, WPI was recorded at 8.6%. Along with WPI, the all-India General Consumer Price Inflation (CPI) also increased to 5.52% in March 2021 vis-à-vis 5.03% in February 2021 and 4.06% in January 2021. The Indian population is already highly sensitive to the price rise. PM Modi was voted to power in 2014 as he had vowed to keep the prices down. However, the Modi government is presently grappling with the pandemic as well as rising prices.
Increase in inflation is a consequence of the extended efforts of the central government and can also be linked to the steps taken by the Reserve Bank of India (RBI). The RBI in order to provide cheap borrowings from the market to the central government made it amply clear that it would keep the 10-year rate on government securities (G-secs) at around 6%. Whenever the market lenders, primarily, the banks and insurance companies insisted upon increasing the interest rates, RBI intermittently jumped into the bond market and purchased G-secs of trillions of rupees. Thus, it artificially kept the interest rates low in the market. Lower interest rates not only helped the government with cheap borrowings, rather, coerced the commercial banks to offer cheap loans to the community as well. It becomes pertinent to mention here that despite a record low rate of interest, credit offtake growth (6.14%) in the year 2020-21 remained lowest in the last 58 years. It is because the sentiments of the consumers were already running low even before the pandemic struck India in 2020. Hence, the idea to kickstart the economy by keeping interest rates low didn’t work well.
Besides keeping interest rates low, the RBI had also been profusely injecting liquidity into the banking system for the past one year or so - conveniently ignoring the fact that it would create inflation in the economy. Repercussions of the stretched efforts to keep the rate of interest low are now ready to cast black spells in the form of runaway inflation, alongside the second wave of the pandemic. However, this is not the only reason for the inflation to return into the Indian economy; rather there are other reasons as well which are discussed in the following paragraphs.
First and the foremost reason for the rising prices or inflation is associated with an increasing number of Covid-19 cases or more aptly, the unbridled swelling of the second wave of the pandemic. After reaching its peak in September 2020, the first wave of infections tapered off by February 2021. However, the latter half of April 2021 again witnessed a massive surge in infections. Not only the number of cases advanced, rather precious lives got lost owing to the awful management of healthcare facilities (hospital beds, ICU beds, ventilators and oxygen etc.) for the infected patients. In the absence of any pragmatic arrangements to curb the growing infections, state after state announced partial, extended or full lockdowns. It eventually led to a disruption in the movement of goods and delivery of services. Choking of supply chains has already led to a spike in inflation, which is expected to rise sternly in near future.
Secondly, recovery in the global economies with vaccination drives picking up and ultra-low interest rates led to an increase in the commodity prices. Besides, additional savings of the households (attributed to the direct monetary transfers by the governments of advanced countries) along with pent up demand will now push up the consumption further thereby leading to an increase in prices. Specifically, the prices of copper, aluminium, tin, nickel and zinc have experienced an increase of 26.3%, 19.2%, 46.6%, 25.1% and 12.4% respectively in April 2021, vis-à-vis their prices seven months ago. The imported inflation corroborated an increase in the prices of those finished goods which use them as an input. For example, an increase in the prices of iron ore resulted in an increase in the prices of steel that eventually led to the swelling of prices of different models of cars and bikes manufactured by automobile companies like Maruti Suzuki, Ford, Hero MotoCorp etc.
The magnitude of inflation is projected to rise further with the depreciation of the rupee. Sooner than later, the central banks of those countries, which have overcome the second or third waves will increase their interest rates. This increase in interest rates will go contrary to the efforts of the Reserve Bank of India which has continuously tried to keep interest rates low in the country. We shall be totally out of sync with other countries of the world in terms of interest rates. Precisely, if the US Fed increases the interest rates, there will be a flight of capital from India to the US - thereby leading to a depreciation of Indian rupee which will render imports further costlier.
Thirdly, in order to strengthen the Atmanirbhar Bharat or self-reliance, the Indian government in its latest Budget raised duties on about 1250 items out of the 10400 odd items in the customs list. Budget 2020 also saw an increase in duty for about 1600 such items. It included mobile phone parts, plastics, rubbers, solar lamps and inverters etc. Though the production linked incentives are also being extended to few industries to neutralize the impact of increase in custom duty and augment exports, yet Atmanirbhar Bharat initiatives, as of now, have just translated into the amplification of prices for the goods produced.
Fourthly, as mentioned above, the RBI is continuously expanding its asset books with bonds and foreign exchange reserves and to neutralize the horrid impact, printing more currency. Thus, the currency in circulation (currency with the public and cash with banks) also increased. The data released by RBI indicates that currency with the public rose to ` 29 lakh crore on April 23, 2021. Interestingly, this currency with the public is rising even when digital transactions are also rising. This behaviour of the public is not beyond understanding as people want to hoard cash during threatening conditions for precautionary purposes. The currency in circulation could increase further if the government/state governments introduced any cash transfer schemes in the midst of the pandemic. Astonishingly, on one hand the currency with the public is rising, and on the other, high frequency indicators like IHS Markit India Purchasing Managers’ Index (PMI), GST E-way bills and growth rate in Index of Industrial Production are performing in a subdued manner. PMI, which indicates market trends according to the purchases made by the managers’ remained low at 55.5 and 54.0 for the manufacturing and services sectors respectively, which stood weak since February and January 2021. E-way bill generation on the GST Network (GSTN) till April 25 this year also declined to 1.95 million per day (average) from 2.29 million per day generated in the previous month. India’s factory output measured as an index of industrial production also witnessed a contraction of (-) 3.6% in February 2021 primarily due to the weak performance by mining and manufacturing sectors. Subdued performance in high frequency indicators against rising currency in circulation testifies that high inflation cannot remain elusive in near future.
Fifth, the surge in oil prices is another monster impacting inflation in India. From a low of $40 per barrel in October 2020, Brent crude has risen to nearly $68 per barrel in the first week of May 2021. As discussed above, since the advanced economies of the world are now overcoming the corona war, demand for the crude oil as well as its price are heading north. As India caters to its nearly 80% oil requirements through imports, hence any rise in global crude prices affect us directly. Further, stubbornness of the central and state governments to reduce taxes on oil (amid weak economic recovery and resultantly lower revenues for the governments) even during the course of rising crude oil prices are expected to put a deeper dent in the pockets of Indian consumers in future as well. For the reason that the rise in prices of oil has cascading effects, it will soon translate into an escalation in transportation costs, leading to an increase in prices of intermediate and final goods and services, thereby fuelling the inflation further.
As the situation stands, where on one hand economies of the world are swiftly recovering on the back of increased economic activities and vaccination, the Indian economy will have to wait to make a comeback. Till the conditions improve, slack economy with high rate of inflation will keep on adversely affecting both the consumers as well as investors in India.