NEW DELHI: Two sets of data released on Thursday held a mirror to the grim economic situation in the country. While retail inflation jumped to an eight-year high at 7.79% in April, in a way justifying the Reserve Bank of India’s sudden move on May 4 to jack up the repo rate ahead of schedule, industrial production grew at a dismal pace of 1.9% in March. In February, the Index of Industrial production, which measures the industrial activity in the country, had showcased a growth of 1.7%.
The latest inflation shock is on the back of increase in prices of food, fuel & light, and transport and communication. Inflation in the food basket rose to 8.38% in April from 7.68% in March, data showed. The higher than expected price rise was more broad-based with miscellaneous items, fuel and light, and clothing and footwear also contributing to the inflation.
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This is the fourth straight month inflation lies above the Reserve Bank of India’s upper tolerance level of 6%. Back in May 2014, inflation was at 8.3% and in March 2022, it stood at 6.95%. The apex bank’s task is to maintain retail inflation at 4% with a margin of 2% on either side for a five-year period ending March 2026. Experts say the continuous rise in inflation will push RBI to further increase the interest rate by 50 basis points (bps).
Recently, it had raised the repo rate by 40 bps to 4.4% and the cash reserve ratio by 50 bps to 4.5%. Owing to good growth in direct and indirect tax revenue, the Centre can opt to reduce union excise duty on petrol to contain inflation. Higher interest rates could hit investment and growth, warns D K Srivastava, chief policy advisor at EY India. But he adds that there may be a positive spinoff as well, thanks to higher growth in taxes linked to higher nominal growth.
However, even with the upward trend in inflation, the Centre seems optimistic about its impact on low-income groups. “Evidence on consumption patterns suggests that inflation in India has a lesser impact on low-income strata than on high-income groups,” the ministry said in its latest monthly review report. Meanwhile, equity markets continued to dip over scary US inflation data with the Sensex crashing over 1,158 points and the Nifty tanking below the 16,000-level on Thursday.