India's solemn vow of 2-6% annual price rise is broken, yet again.
Headline inflation shot up to 6.26% in June over last year. With this, consumer price inflation at 5.5% in Q1 may well be within the RBI's higher tolerance band of 6%, but it overshot the central bank's 5.2% forecast for Q1.
While headline inflation at 6.26% is better than feared (owing to lockdowns and curfews), food and fuel inflation remained elevated at 5.15 and 12.6% respectively.
The country's designated inflation-nutter RBI will cite supply-side pressures and volatile commodity prices, especially crude. So when the Monetary Policy Committee (MPC) huddles next month, it will likely sit out this round and as Governor Shaktikanta Das emphasised, policy tightening is off the table.
Inflation control, as economist Friedrich von Hayek noted, is like trying to catch a tiger by its tail. Often, this job is handed over to central banks, whose preemptive maneuvers attempt to rescue us from being eaten alive by the inflation tiger.
But, because monetary policy has little control over food and fuel prices that account for 60% of the CPI basket, it's about time the central government -- the sole authority to tame prices -- is made a co-rider in the dangerous tiger-taming act.
Sensing looming trouble, RBI has lobbed the government with a soft-ball suggestion in its last MPC meeting. It urged both the Centre and state governments to adjust (lower) excise duties, cess and taxes on petrol and diesel to reduce input cost pressures. Such a move will not only lower fuel bills for consumers, but also reduce transport costs, which feed into food inflation.
For instance, the IMF All Commodities index shot up by 70% in May, with a nearly 250% rise in natural gas prices. Besides, ocean freight rates, as measured by the Baltic Dry Index (a measure of shipping costs), shot up 2-3 times in the last one year, pushing up logistics costs of India's handsome food imports.
But the government is yet to swing at that pitch.
Evidence, by the government's own admission, suggests that both food and fuel inflation tigers have been on the loose, particularly the former for not one, but the last two years.
As the Ministry of Finance's latest monthly economic report observed, food inflation has been on the jump in FY20 and FY21 at 6.7% and 7.7% respectively after declining in FY18 and FY19. If pulses pushed prices in FY17-FY19, vegetables, and protein-rich items did the job in FY20. Meat and fish, oil and fats took the baton in FY21. Even in the latest print, inflation rate for both clocked double digits at 19.35% and 34.78% respectively.
Blame it on pulses, protein foods and perishables all you can, but the brutal truth is that the food inflation monster is never dead. The central bank cannot prevent shots being fired unless the government too joins forces in this ceaseless vigil on price stability.
The government did tinker with import duties, export restrictions, higher minimum support prices and imposition of stock limits to regulate domestic availability and moderate prices. To increase agricultural production and productivity, last month, as part of the economic stimulus package, the government decided to assist farmers with high-yielding seeds for multiple crops. While these will yield in time, there's an immediate problem approaching us.
According to various monsoon trackers, overall rainfall is 8% below normal and sowing is lower than last year. If rains don't pick pace in July-August, lower crop yields will feed into the food inflation monster. The government's 'Operation Green Scheme', which includes 22 perishable products helps stabilize prices, but more such supply-side interventions are needed to soften anticipated price rises. For, inadequate fiscal response if inflation persists only burdens the actions of monetary policy.
Meanwhile, RBI is taking comfort in the fact that inflation due to idiosyncratic factors like food and oil price rises is transitory, but then core inflation (stripped of food and fuel) at 6.2% in June is exhibiting signs of trouble.
Regardless of whether prices rise due to cyclical, structural, demand-side, or supply-side factors, eventually, if inflation rises faster than incomes, it leads to a loss of purchasing power. That's precisely the current reality.
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