India’s CPI inflation below target, but could get worse

• India has witnessed a 6-month record surge in consumer price index (CPI)-based inflation and retail inflation in April’19.
• The main cause for this inflation is the rise in food and fuel prices over the last six months. At the same time, there has also been a slowdown in industrial production in a few sectors.
• Increase in prices in these sectors, in turn, has been the product of a number of intrinsic and extrinsic factors.
• Slowing growth may compel RBI to cut rates during its next review in June 2019, but it must also weigh in the impending rise in crude prices.

The Indian economy witnessed an upsurge in consumer price index based inflation, which rose from 2.86% in March’19 to 2.92% in April’19, the maximum rise in the last six months. The key contributing factors include growth in the food and beverages segment and mounting fuel prices.

Parallelly, retail inflation quickened to a six-month high of 2.92% in April’19 according to data released by the Central Statistics Office (CSO). This is in sharp contrast to January’19, when it plummeted to a low of 2.05%. At the same time, it is well below the RBI mandated inflation target of 4%.

The findings of CSO suggest that food price inflation accelerated by 1.38% in April compared to 0.66% in March. Prices of a number of agricultural products have steadily risen over the last few months, due to structural supply constraints. These include a host of farm commodities including coarse grains, cattle feed ingredients, fruits, cotton and seasonal vegetables.

While agro-climatic factors such as drought in major parts of Maharashtra, Gujarat, Karnataka, Andhra Pradesh and Telangana have triggered bottlenecks in supply; sustained low production practices are also believed to have contributed to the same. These are indubitably bound to impact yields and supply chain. At the same time, given the possibility of a bleak monsoon in the face of an El Nino event, CRISIL predicts that food inflation will rise further.

The fuel and light segment also saw inflation increase to 2.56% from 2.34% during the period between March’19 & April’19. Myriad international developments over the past few months have contributed to the rise in fuel prices, including military action in Libya, supply cuts from OPEC and slowdown in crude production in Venezuela due to imposition of US sanctions.

The recent source of turbulence in the international oil market, which could send prices soaring in India are the sanctions by US against Iran. Washington has lifted waivers that allowed Tehran to indulge in oil trade with other countries. This will have a major impact on India, since it is the second largest importer of crude from Iran. There is a general understanding that fuel prices will rise after the wrapping up of the 2019 general elections.

The age-old inflation-growth conundrum

At the same time, the Index of Industrial Production (IIP) data points out that the country’s industrial output declined by 0.1% in March’19, hitting a 21-month low. This has been associated with contraction in manufacturing (0.4%), capital goods (8.7%) and consumer durables (5.1%). The previous low for IIP was a 0.3% decline recorded in June 2017. Industrial credit is constrained, making life tough for MSMEs in particular. The slowdown in the private sector can be gauged from the fact that new investment proposals were recorded at Rs 9.5 lakh crore in 2018-19, compared to an average of Rs 25 lakh crore during 2006-07 to 2010-11.

GDP is expected to have slowed down for the fourth consecutive quarter to 6.5% in the three months ending March 2019, and Credit Suisse estimates the sluggishness to continue for a year due to high interest rates and stress in state-run and shadow banks.

The debacle facing NBFCs is also impacting consumer credit, which is consequently hurting dependent sectors like consumer durables and automobiles. Total automobile industry sales slid by nearly 16% in April, according to data from SIAM, while consumer durable output dropped by 5.1% YoY. But the malaise is actually wider if you consider the FMCG sector, wherein leading companies like HUL, Godrej Consumer Products Ltd, Dabur and Britannia showing a substantial decline in volume growth; led in particular by slowdown in rural consumption.   

The Reserve Bank of India, is set to have its next Monetary Policy Committee meeting on June 6. In the light of weak industrial growth and inflation being still below target, it is likely that the RBI will cut rates, injecting more liquidity into the Indian economy and creating channels for growth. However, it will also have to consider what the data portends on inflation expectations going forward, especially with the possibility of rising crude prices.