High inflation bane for ailing economy

Retail inflation eased a bit in August to 6.69 per cent thanks to softening prices in some categories of food items. This inflation print was 6.73 per cent in the preceding month of July. Though key food inflation came down marginally thanks to reduction in prices of cereals, milk products and pulses, fruits and vegetables, however, turned costlier during the month. As per the official data announced on Monday, the retail inflation in the fuel and light category too accelerated to 3.10 per cent from 2.80 per cent in the previous month, keeping the inflation trajectory at elevated levels.

However, despite a slight decline, the consumer price index (CPI)-based retail inflation still remained outside the comfort zone of the Reserve Bank India (RBI) last month. As per the central government's mandate, the apex bank needs to keep retail inflation at 4 per cent with +/- 2 per cent. That means the tolerable inflation range for RBI is two to six per cent.

Moreover, the wholesale price index (WPI)-based inflation also climbed up in August after hovering in negative territory for four months since April this year. The wholesale inflation accelerated by 0.16 per cent last month as manufactured products and food items turned expensive. Potato, a staple diet in North India, saw its prices soaring by a whopping 82.93 per cent, while wholesale prices of onions were down by 34 per cent in August. The wholesale inflation remained at 1.17 per cent in the same month a year ago.

It is said that supply chain disruptions due to Covid-19 crisis are partly fueling inflationary pressures in the country. Localised lockdowns to control the pandemic are further pushing up prices. A day before the inflation data for August month was out, Chief Economic Advisor KV Subramanian expressed optimism that with the easing of lockdowns, the retail inflation would come down considerably. His prediction turned out to be inaccurate as inflationary pressures were at elevated levels in August too. As Covid cases are on the rise and there is no end in sight to the pandemic, it is very unlikely that inflation will come down significantly in the coming weeks.

Our economy contracted by a whopping 23.9 per cent during the first quarter of this fiscal. That means nearly a quarter of India's GDP evaporated during those three months. Global rating agencies had drastically cut down GDP growth forecasts for the current fiscal after the official GDP data for April-June was out. Last week, global rating agency Moody's projected that Indian GDP would contract by a staggering 11.5 per cent in the current fiscal. Its rival S&P pegged the GDP contraction at -9 per cent. So is also the Asian Development Bank.

However, high inflation is a bane for the economy at a time when GDP has slipped into steep negative territory. It's a piquant situation for RBI also. To spur the economic growth, it will have to cut interest rates. But lowering interest rates at this juncture will further fuel inflationary pressures. So, the economy is at crossroads now and the central government has its task cut out. The trillion dollar question is how will it revive the GDP growth.