Inflation Trends in India

Official data on retail food and fuel costs remain the main driver. Inflation continues to accelerate and output at the country’s factories contracted for a second straight month.

While inflation quickened to a four-month high of 5.52% in March, as per provisional data from the National Statistical Office, the NSO’s quick estimates of the Index of Industrial Production for February show output including at mines, the manufacturing sector and electricity generators shrank 3.6%, following on from January’s 0.9% contraction.

Food and Fuel Costs

Consumer Price Index numbers show that stubbornly high food and fuel costs remain the main drivers of price pressures.

Pulses and edible oils, key kitchen staples and vital nutritional sources for proteins and fats, have been climbing almost dizzyingly for the last few months, a fact not lost on the RBI.
While inflation in pulses accelerated to 13.3%, from 12.5% in February, oils and fats saw a more than 400 basis points surge to 24.9%.
In its policy statement this month, the central bank hoped that arrivals from the rabi harvest as well as imports would likely augment supply, helping moderate the prices of pulses.
Similarly, on edible oils, the RBI is rather optimistically banking on the government to cut import duties and offer incentives to boost domestic production to counter the heightened inflation.
With meat and fish, and eggs yet again posting double-digit increases, inflation in the food and beverages category quickened almost 100 basis points to 5.24%.

Transport And Communication

Disconcertingly, transport and communication also saw a more than 100 basis points acceleration t
o 12.6%, and this despite the pump prices of petroproducts remaining virtually frozen through the month, ahead of the March 27 start of Assembly elections.
The most plausible explanation is that the freight and urban transport sectors saw a lagged pass-through of the preceding months’ steep increases in automobile fuel costs.
Price pressures are unlikely to ease significantly in the near term, unless the Centre and the States bite the bullet by agreeing to forego some near-term revenue from petroproducts and reduce fuel taxes.
The RBI, which has been stridently seeking a reduction in these levies, foresees inflation averaging 5.2% in the April-June quarter.

Mining, Manufacturing

Separately, the IIP data shows mining continuing to backslide, manufacturing struggling for traction with an output of capital goods, construction gear and consumer non-durables all contracting in February.

Policymakers face tough choices in trying to nurse back demand- Reducing Taxes, Easing Interest rates etc., And they must do this without letting quickening inflation undermine purchasing power and overall economic stability.