India grapples with managing problematic rise in prices

The prices of basic foodstuffs are rising continually in India, squeezing lower paid consumers and preventing interest rate cuts.

India’s prime minister, Narendra Modi, said that his government was striving to keep inflation in check and backed a target of 4 per cent. Sanjit Das / Bloomberg

MUMBAI // Lokhandpal Chowbey, a watchman at a block of apartments in Mumbai who earns 6,000 rupees (Dh328) a month, finds managing his monthly household expenses increasingly challenging.

“The price of vegetables is rising and that makes it very difficult to manage other things like paying for my children’s education,” he says.

Inflation, which had eased over the past couple of years, has shot up again in India, driven largely by a rise in food prices.

This comes at a time when India’s “rock star” central banker Raghuram Rajan is about to leave office in a couple of weeks, after completing his three-year tenure. There had earlier been widespread expectations and hopes that he would do another term.

“Inflation continues to be a problem,” said V K Vijayakumar, the chief investment strategist at Geojit BNP Paribas.

“Even though the commodity price crash has brought down inflation from the high levels of 2013, it continues to be an area of concern, causing distress to poor people and posing major challenges to policymakers.”

Official figures released on Tuesday revealed that wholesale prices in India rose above expectations by 3.55 per cent last month compared with a year earlier because of higher food costs. This was near a two-year high for inflation. Food prices surged by double digits of 11.82 per cent from the same month last year, compared to a rise of 8.18 per cent in June. Prices of vegetables and fruits rocketed 22 per cent last month year-on-year, while grains shot up 13.6 per cent.

Wholesale prices have risen for four consecutive months to July, following 17 months of deflation, as prices eased, partly because of lower oil prices.

Mr Vijayakumar describes food inflation as “a major area of concern”. The price of tomatoes in particular became a talking point in recent months, with the cost of tomatoes hitting 100 rupees a kilogram as drought hit parts of the country. The supply of pulses such as lentils has failed to keep pace with the rising demand for protein-rich food.

“Since people spend a major part of their income on food in a poor country – in India food articles account for 45 per cent of the consumer price index – inflation really hurts, particularly the poor,” Mr Vijayakumar said.

The cost of services, including health care and education, is another area in which prices are rising.

So pressing is the issue of inflation, that India’s prime minister, Narendra Modi, in his independence day address on Monday said his government was striving to keep inflation in check.

“I will do my best and will not let the food plate of the poor person get costlier,” Mr Modi said.

A concern for businesses is that high levels of inflation prevent the Reserve Bank of India (RBI) from cutting interest rates. Industry has been calling for interest rates to be trimmed to make it cheaper for businesses and consumers to borrow funds, which would help to stimulate the economy.

“We think that [inflation] will accelerate further,” said Shilan Shah, the India economist at Capital Economics. “In particular, the deflationary impact from the sharp fall in global oil prices should continue to ease. This supports our view that there is little scope for further monetary loosening.” He forecasts that interest rates will remain on hold at 6.5 per cent for the rest of this year and next year.

“The low levels of industrial production and poor corporate profitability have been major drags on the economy,” Mr Vijayakumar said.

“The deficiency in aggregate demand is a serious issue adversely impacting private investment and economic growth. A rate cut can help in reviving demand and stimulating investment and growth, which is why businesses and the industrial sector have been clamouring for lower interest rates.

“However, the RBI is not likely to oblige when inflation rates are trending up and remain above the RBI’s comfort zone.”

Mr Rajan is set to step down as governor of the RBI on September 4. There are some concerns that the transition could prove to be a setback when it comes to controlling the problem of runaway inflation.

“The existing governor was doing a good job, we should have given him more time,” said Arun Kharat, the founder and director of Wings Travels, a travel company based in Pune.

“It will start again from ground zero with a new vision, which can actually slow down India’s growth.”

He said the inflation situation desperately needed to be managed.

“This may lead to [the] rich becoming richer and [the] poor [becoming] poorer,” he said. “One can’t buy all that they want for their basic needs. This also leads to holding and stocking of goods to benefit from the inflation anticipation.”

Arun Singh, the lead economist at business information provider Dun & Bradstreet India, said there were factors on the horizon that could be set to stoke inflation.

“While it is expected that the supply of food in the market post a period of better monsoon will alleviate some of the inflationary pressures, the expected rise in rural demand along with the implementation of one-rank one-pension for retired defence employees and the seventh pay commission recommendations will provide upward pressure on the overall inflation,” he said.

The implementation of the pay commission’s recommendations for public sector employees in India, which include an increase in housing allowances, are expected to boost consumption and could drive prices higher.

The recently announced goods and service tax (GST) could also push inflation upwards in the short to medium term, Mr Singh said. He said it was reassuring that the authorities are taking steps to bring inflation under control.

“The government has been undertaking supply side measures [for crops] such as supply-management measures and the introduction of the electronic national agriculture market-trading portal, allocation of funds to strengthen the warehousing infrastructure,” Mr Singh said.

Mr Vijayakumar is fairly optimistic the inflation scenario will improve in the coming months, with relatively good monsoon rains this season, following two years of weak rainfall.

“The best news from the inflation perspective is coming from the progress of the monsoon,” he said

“If monsoon continues to be good during August and September, a bumper harvest is likely. A bumper harvest will certainly bring food inflation down. If this happens, the RBI can cut interest rates by another 25 basis points by December, thereby providing a major boost to business and the economy.”

For Mr Chowbey, as he struggles to manage his household expenses amid rising prices, such relief cannot come soon enough.

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