Retail inflation in August at 7% year-on-year (y-o-y) was a nasty surprise, courtesy higher food prices that went up 7.6% y-o-y. However, one cannot ignore core inflation which remains stubbornly close to 6% y-o-y, a reflection of how broad-based price pressures are becoming. Prices of food could taper off in the coming months as supply-side constraints ease and seasonal effects kick in, though there is some concern that the uneven distribution of rainfall could see a smaller harvest, especially of the rice crop. Inflationary pressures, however, appear to be becoming entrenched in the organised corporate sector as the bigger companies wean away share from smaller players and gain pricing power. Indeed, a look at the core inflation basket indicates firms continued to pass on higher input costs to consumers.
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Despite commodity prices softening, goods have become costlier as companies are looking to protect or grow their margins. Moreover, the re-opening of the services sector has added to price pressures, in areas like education. The increase in house rents in August was 4% y-o-y compared with 3.8% y-o-y in July. Again, although the rise in rural wages has been subdued, there is undoubtedly momentum in the increase in salaries and wages in urban India. But the bigger concern at this point is a listless economy. At 2.4% y-o-y, the growth in factory output in July has been uncomfortably low, coming after a 12.7% y-o-y in June, with sequential momentum down by a precipitous 4.6% month-on-month, seasonally adjusted. As Sonal Varma, chief economist, India, Nomura, points out, there has been a broad-based fall, notably in the categories of consumer durables, capital and primary goods. The Q1FY23 GDP data had indicated that the economy was not exactly galloping along even though growth came in at a 13.5% y-o-y. Importantly, consumption wasn’t picking up as anticipated; private final consumption expenditure (PFCE), at `22 trillion in Q1FY23, was only about 10% more than the spend in Q1FY20, which in itself was an absymally poor quarter.
Economists point out the rural economy is performing below par with agricultural wages still somewhat weak and the terms of trade against farmers. That might change with the monsoon being reasonably good and agricultural credit continuing to grow at a decent pace. However, support provided by the fiscal expenditure in rural India during FY21 is now smaller, and could slow consumption demand.
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Consumption demand could also moderate as the job market weakens. While certain sectors continue to hire in large numbers, the demand for jobs is outstripping the supply. CMIE says unemployment shot up to 8.3% in August, the highest levels in the past 12 months with the labour market shedding 2.6 million jobs. It is evident now that the economy may not grow by more than 7% in FY23; some economists have even lower forecasts. Given this, Reserve Bank of India (RBI) must consider calibrating the pace of rate hikes because it simply cannot risk the economy stalling. Even if it doesn’t come off to sub-6% immediately, inflation should moderate over the coming months as commodity prices soften in the wake of slowing global growth. Back home, the government will also likely take measures to rein in food prices and shore up buffer stocks. However, higher rates will hurt businesses, especially small ones, and, in turn, employment. RBI must now bat for growth.
