india

Updated: Nov 13, 2018 08:24 IST

Retail inflation data released on Monday holds bad news for farmers, the government, and industry, with a disaggregated reading of the numbers showing that food inflation has turned negative and core inflation remains obstinate (and has actually increased). The first means that farmers haven’t benefited from the government’s move to raise minimum support prices; agrarian distress, largely caused by poor market linkages and falling prices of food, has become a significant political issue. The second means that the Reserve Bank of India will likely retain its hawkish stance, despite demands from industry, and also some quarters of government, that interest rates be reduced to aid the cause of growth.

The Indian economy was staring at an inflationary spike due to rising oil prices and falling rupee as recently as a month ago. These fears are not as pertinent anymore. Brent crude has fallen by almost 15% in the last one month. The rupee has reversed its falling trend vis-à-vis the dollar during this period.The Latest Consumer Price Index (CPI; India’s benchmark inflation measure) data has brought further relief on this count. Annual growth in CPI went down by 39 basis points between September 2018 and October 2018. One basis point is one hundredth of a percentage point. Inflation growth in October 2018 was 3.31%, the lowest since November 2017.

The details show that prices of food products actually fell, even as those of non-food and non-fuel product categories rose. The former is bound to worsen rural distress, while the latter lowers the probability of a rate cut. Food and beverages is the only sub-component of CPI which registered negative inflation in October 2018. The decline in overall CPI is a reflection of the fact that this category has a weight of 45% in the commodity basket used to calculate CPI. Prices of vegetables, pulses and sugar continue to fall. Even that of cereals, which were expected to strengthen after the government announced a significant hike in Minimum Support Prices (MSPs) for Kharif crops, have seen a decline in inflation in October 2018. Annual growth in inflation for cereals in the period between April 2018 and October 2018 was 2.77%. This is the lowest since 2016-17.

Meanwhile, core inflation continues to remain high and has actually gone up by 29 basis points to 5.84% in October 2018. Core inflation is a better indicator of non-cyclical inflationary pressures in the economy and hence is given importance in decisions such as setting interest rates. Rising core inflation might dent hopes of a reduction in policy rates by RBI in its next monetary policy review in the first week of December. Businesses gain from lower interest rates.

The Index of Industrial Production (IIP), or factory output growth, the short term indicator for industrial activity fell for the fourth consecutive month, and grew by 4.47% in September 2018. Prime Minister Narendra Modi announced a scheme earlier this month, which would enable small and medium enterprises to get a loan in just 59 minutes. This suggests a political premium for providing cheaper and easily accessible loans in the economy.

“Declining food inflation in October, when harvesting actually starts, shows that the increase in MSPs has not helped much,” said Pranab Sen, former chairman of the National Statistical Commission. This also shows that the farmers protests can’t just be wished away, Sen added. That’s worrying news for the government politically.