Has Inflation really stopped hurting low income Indians?

Three Indians would have heaved a sigh of relief when the National Statistical Organization released retail inflation figures for July 2022. Confounding pessimists and skeptics, retail inflation based on the Consumer Price Index eased to 6.71% compared to 7.01% in June.

Three Indians would have heaved a sigh of relief when the National Statistical Organisation released retail inflation figures for July 2022. Confounding pessimists and skeptics, retail inflation based on the Consumer Price Index eased to 6.71% compared to 7.01% in June. The Governor of the Reserve Bank of India would have heaved a sigh of relief because there is now less pressure on him to go for massive interest rate hikes to tame inflation; a move that would have definitely stopped economic recovery on its tracks. Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman too would have heaved a sigh of relief, albeit for different reasons. As the opposition parties organise street protests against high prices and inflation, the ruling party can cite declining inflation since the peak of April as an achievement. In any case, ruling party spokespersons have been insisting that inflation has been a global phenomenon in 2022 and India has performed better than most major economies on this front. What about the lower income Indians, who also happen to be the largest block of voters in India during elections? There is definite relief for them as food inflation is at 6.75% though vegetable inflation at 10.9% and fuel inflation at 1.7% must be hurting.

But inflation worries have definitely not come to an end. As the accompanying chart shows, retail inflation has been consistently above 6% since January 2022. It reached an alarming level of 7.78% in April forcing the RBI to go for a 40 basis point interest rate hike. Though the rate of inflation has eased since then, the RBI has gone for two more rate hikes just to ensure that inflation remains under control. The self imposed rules of the RBI make it clear that retail inflation should not cross 4% in the medium. Besides, an inflation rate in excess of 6% is unacceptably high. The fact is that retail inflation has breached the 4% target almost continuously for three years and now it is seven consecutive months since retail inflation has been higher than the “unacceptable threshold of 6%. To that extent, analysts seem convinced that the RBI will go for another interest rate hike when the Monetary Policy Committee meets in September. In any case Shaktikanta Das has publicly stated and admitted that retail inflation will be significantly higher than 6% in the current financial year.

One reason why just hiking interest rates may not be enough to tame inflation is that a lot of it is supply driven. Take the example of pulses. For the month of July, the retail inflation for this category has been a very satisfactory 0.18%. But sudden shortages in August have led to prices of pulses shooting up by 15% and more. This has so worried the government that it has invoked the Essential Commodities Act for some varieties of pulses on August 12 to control both speculation and another spike in prices. But barring these occasional supply driven spikes, it s clear that when the Kharif harvest comes in, the dangers of 7% retail inflation would have faded completely.