Informist, Wednesday, Sep 18, 2024

NEW DELHI – Can a lower-than-expected inflation number be a headache for a country such as India? Sometimes, it can. At a four-month low, the latest wholesale inflation figure of 1.31% for August was nearly half a percentage point below economists' expectation of 1.8%. And while there is a definite upside to the fall in Wholesale Price Index inflation, there is more to it.

First things first: the fall in WPI inflation last month was broad based. While food inflation eased to 3.26% in August from 3.55% the previous month, fuel inflation fell below zero after a gap of three months to -0.67%. Meanwhile, inflation for manufactured products – which account for nearly two-thirds of the WPI – declined to 1.22%, bringing core inflation down to 0.7%. A combination of a favourable base effect as well as cooling global commodity prices helped.

Even though September should see an increase in inflation on account of a low base and the possible impact of excess rains on food prices, economists agree the outlook is benign. If anything, Barclays sees the fall in wholesale food prices reflecting "with a lag in retail prices" next month, with "limited price pressures" on CPI inflation from food and core inflation.

Of course, this may not be enough for the Reserve Bank of India to cut the repo rate in October, but every little bit should help the central bank tackle the last mile of disinflation.

Now on to the dark clouds.

"A slower WPI inflation is a precursor to moderation in retail inflation and augurs well from the monetary policy point of view. However, it is also a testimony of weak demand conditions and slower nominal GDP growth, which has implications for the fiscal profile of the economy," noted Paras Jasrai of India Ratings and Research.

The state of demand in the Indian economy has been a matter of debate for some time. The urban segment has seen K-shaped growth, while rural demand continues to tread the path of revival. Industrial production data released last week, which showed output of consumer durable goods was up 10.0% on year in Apr-Jul while that of non-durables was down 1.5%, adds to the mixed nature of the growth picture.

"Growth signals are currently mixed in Q3 (Jul-Sep)," Nomura economists Sonal Varma and Aurodeep Nandi wrote in a note on Sep 13. "While the GDP growth moderation to 6.7% in Q2 2024 (Apr-Jun) from 7.8% in Q1 (Jan-Mar) was due to weaker government spending around the elections, high frequency data point to weaker passenger vehicle and medium and heavy commercial vehicle sales. As such, while catch-up in government spending and rural demand are positives, the softness in consumer discretionary demand, industrial demand, and external demand are negatives."

The weakness in external demand was further backed up by Tuesday's trade data, which showed India's merchandise exports fell for the second consecutive month last month, following up July's 1.5?cline, by an even larger 9.3% contraction in August.

Lower wholesale inflation is also troublesome for the nominal GDP growth rate, pegged at 10.5% for 2024-25 (Apr-Mar) by the Union Budget. While there is plenty of time for the first quarter figure of 9.7% to converge to the Budget assumption, lower-than-expected WPI inflation – which is the major determinant of GDP deflator – makes the government's fiscal consolidation job that little more testing. End

Reported by Siddharth Upasani

Edited by Deepshikha Bhardwaj

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