Rising Inflation & Falling Growth Rate: What Next?

By: Sutanu Guru

According to the latest data released by the Ministry of Statistics & Programme Implementation on October 12, it would also be almost 24 continuous months when retail inflation is higher than the “start worrying” threshold of 4% set by the RBI

Retail inflation based on the consumer price index climbed yet again to 7.41% in September, 2022, significantly higher than the 7% recorded in August. This is the ninth consecutive month in which the retail inflation rate is higher than the “danger” threshold of 6% set by the Reserve Bank of India. According to the latest data released by the Ministry of Statistics & Programme Implementation on October 12, it would also be almost 24 continuous months when retail inflation is higher than the “start worrying” threshold of 4% set by the RBI. By any yardstick, this cannot be good news for Finance Minister Nirmala Sitharaman who was recently seen buying vegetables in Chennai. The process of buying vegetables might have been a good photo op for the finance minister. But it is becoming an ordeal for ordinary Indians with food inflation climbing to 8.42%, the highest level in 22 months. Inflation rate for vegetables was a distressingly high 18.05%. This must be really hurting the pockets of lower income Indians as food has a weight of 54% in the consumer price index. Even core inflation, that excludes food and energy, rose to more than 6%-above the RBI danger mark.

This presents a real dilemma for the Governor of the RBI Shaktikanta Das. Since early May, the central bank has raised interest rates by 1.9% to combat inflation; not with a very high degree of success as the latest numbers suggest. These rate hikes have come at a time when optimistic forecasts made about the GDP growth rate of India are being systematically downgraded by all global and domestic institutions. A few days ago, India Tracker featured an analysis with the headline Can GDP Growth Touch Even 6.5% This Year? (https://www.indiatracker.in/story/can-gdp-growth-touch-even-6.5-this-year). This was after the World Bank had lowered its India GDP growth rate forecast for 2022-23 to 6.5% from an earlier estimate of 7.5%. The only institution left that pegged expected GDP growth rate at above 7% was the IMF. Now even the IMF has downgraded the forecast to 6.8%, though both the World Bank and the IMF say India will be the fastest growing major economy in the current year as well the next one. But that is not much consolation for Das at RBI. The stubborn manner in which retail inflation remans way above 6% might compel the Monetary Policy Committee to go for yet another rate hike. That could almost certainly affect growth prospects in an adverse manner.

In fact, the danger signs are clearly there. Since the crippling lockdown of 2020 was lifted, the index of industrial production has always grown, even if at moderate rates in some months. Yet, after 18 consecutive months of positive growth, industrial production in August, 2022 actually declined by 0.8%. It had grown by 2.2% in July. With the Kharif harvest too declining this year, there is little doubt now that growth in the July-September quarter will be far lower than earlier estimates.

This is clearly a double whammy for the Indian economy.