India importing inflation, won’t come down in a hurry; how govt can help RBI: TOI Online Economists Survey

Feeling annoyed with high prices? That’s not surprising because Consumer price index (CPI) inflation has been above 6% for more than 10 months now! However, India is not alone in facing rising inflation; In advanced economies, this number has reached historic highs! With successive global shocks – first pandemics and now wars – the world’s major economies have been hit hard.
After hitting an eight-year high of 7.79% in April this year, inflation has peaked but will still take time before falling below 6%, according to economists and experts. In a survey of 13 economists and policy advisers conducted by the Times of India Online, the majority of experts think inflation will fall within the RBI’s safe zone of 2-6% in the financial year alone. next.
Are global factors the main driver of inflation in India? How does inflation in India compare to other major global economies? Times of India online survey takes more insight into what is driving inflation in India, when it is likely to drop and what else needs to be done on the monetary front and finance.
CPI dynamics: India’s import inflation
The majority of economists surveyed by TOI Online think that India is importing inflation due to global supply chain disruptions and crude oil shocks. The RBI’s September 2022 Monetary Policy Report also said that the trajectory of the CPI has been affected by the Russia-Ukraine war.

Between March and August 2022, commodity inflation contributed 86% to overall inflation. The RBI report said that perishables, along with grains and medicines, were the main drivers of commodity inflation.

commodity inflation

Contribution of goods and services to CPI . inflation

Food and beverage inflation (with a share of 45.9% in CPI) accelerated to more than 8% in April 2022 due to global supply shortages and adverse domestic weather conditions. Afterward, food inflation eased but rebounded in August with grains and vegetables being its main drivers.

CPI fuel inflation surged over 11% on the back of strong LPG prices and subsidized kerosene prices, reflecting the spike in global energy prices following the conflict in Ukraine. Fuel inflation is now under control due to falling kerosene prices.

It should also be noted that the title CPI . inflation tested a higher tolerance threshold of 6% between January and February 2022 due to adverse effects of base and adhesive core composition.
According to Ranen Banerjee, Partner and Head of Economic Advisory Services, India’s inflation is being hit hard by import inflation because our import volume is very large. Banerjee explains that unlike global economies, monetary interventions to tackle inflation in India have no impact on demand (although there is a collateral damage there!) .
“Monetary intervention necessitates maintaining interest rate differentials between the US/other advanced economies and India to address any significant impact on the exchange rate from adverse capital flows leading to to more import inflation as imports are more expensive in rupee terms,” ​​he said. told TOI while answering the survey.

import inflation

Contribution of import inflation

As evident in the chart, the war-induced increase in global commodity prices contributed to an increase in the contribution of imported components to overall inflation between March and June 2022. Then, The drop in international commodity prices in July-August 2022 has reduced import inflation.
The RBI also notes that global inflation and higher global interest rates impact capital flows, putting downward pressure on the local currency and leading to higher import inflation.
Madan Sabnavis, Chief Economist at Baroda Bank stated that inflation is being driven by supply-affected food prices and production inflation as companies are still in the process of shifting input costs. than to consumers. He told TOI that services are also leading to higher input costs (electricity, labor, rent, etc.).
India vs advanced economies
The International Monetary Fund (IMF) has forecast that global inflation will increase from 4.7% in 2021 to 8.8% in 2022. In fact, CPI inflation in advanced economies is expected to increase. will reach an all-time high.

According to the RBI report, inflation is increasing across economies as a result of persistent cost-push pressures from higher food and energy prices, rising wage costs and supply chain bottlenecks due to the pandemic. prolonged as strong recovery in domestic demand in some economies added to price pressures .

This has led to central banks across economies tightening monetary policy aggressively. In India too, the RBI has increased its key policy repo rate to 190 basis so far this year.
However, RBI governor Shaktikanta Das in his September policy statement said that India is in a better position than other economies. “The unusual global circumstances causing increased inflationary pressures have affected both AEs and EMEs. However, India is better positioned than many of these economies,” he said.

Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services points out that while India’s inflation could average ~7% or 1.75 times the medium-term target, it is far below inflation is extremely high in advanced economies, at 3x-4x of the target.
Dharmakirti Joshi, Chief Economist at CRISIL notes that in India, inflation is not only lower but also due to more supply than in some advanced countries. Agreed, Sachchidanand Shukla, Chief Economist of Mahindra Group, who added that unlike in India, an advanced economy like the US is seeing more demand leading to rising inflation.
DK Srivastava, Chief Policy Adviser at EY says that most of the inflation globally as well as in India is due to supply-side disruptions and cost-push factors. He noted that the RBI continuously monitors inflation and repo rate hikes. “It is simultaneously achieving the goal of curbing inflation while minimizing the adverse impact on the exchange rate and growth rate,” he added.
CPI inflation: When will it ever go below 6%?
An economist at a prominent housing finance company said that the trajectory of inflation will largely depend on the course of the Russian-Ukrainian war. “Inflation will start to fall when the war is over. That will be the turning point,” the economist said.
Dr. Rupa Rege Nitsure, Group Chief Economist at L&T Financial Services sees inflation below 6% in FY2024. She says this will be driven by a drop in global commodity prices. including Brent crude oil prices) and food prices. She said that a favorable statistical base effect would also reduce overall inflation, adding that the RBI’s monetary tightening would also have a lagging effect.
A leading economist at an industry body feels that without a new price shock, CPI inflation will fall below 6% by March 2023. “The weight of the food basket in India is very high in India. .
Incidentally, a report by SBI Ecowrap in September also said the CPI basket has not changed since 2012 and this could also lead to multiple CPI inflation.
Dr Arun Singh, Chief Global Economist at Dun & Bradstreet doesn’t see an easy path forward for inflation to come down. “CPI will fall below 6% at the beginning of FY 2025 as energy prices are expected to continue to rise and supply tension due to geopolitical risks will drive prices of essential commodities higher,” he said. speak.
“Energy and food both contribute to more than 52% of overall inflation. Given that agriculture is monsoon dependent and requires more than 80% of oil to be imported, India’s inflation dynamics depend on fluctuations in the economy. Monsoons and geopolitical events impact the movement of oil,” he demonstrates.
According to the RBI report, CPI inflation will only gradually stay within the target range. The outlook, however, is fraught with significant uncertainty due to volatile geopolitics, spillovers from increased volatility in global financial markets and global financial conditions. adverse climate recurs”.
What more can be done to reduce inflation?
Sabnavis of Baroda Bank thinks currency intervention is only part of the solution. “We need financial intervention through tax breaks to reduce taxes. This is not just gasoline and diesel but also GST on goods and services,” he said.
Mahindra Group’s Shukla advocates the use of fiscal measures to complement monetary policy. “The previous government has reduced import taxes on cooking oil, regulations on import and export of certain items and taxes on gasoline and diesel have been reduced,” he said. “These steps have been used judiciously, so some of these may be revisited to control inflation. Also, gold imports have increased sharply in volume, which is an area where gold is an area of ​​concern. other that the government can act on financially,” he added.
On the other hand, Nitsure of L&T Financial Services believes that even if the current inflation is caused by a supply shock, monetary policy will be effective in controlling it with lagging.
The broad consensus among economists is that despite adverse global headwinds, Indian economy better placed and elastic. With several world economies facing recession and high inflation, there is no doubt that the RBI and the government have a difficult task to sustain India’s growth while keeping inflation under control. .


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