India has two indices to measure inflation and currently both of them are telling a different story. The latest wholesale price index (WPI) has gone down from 7.24% to 7.14%. But this is in contrast to the consumer price inflation (CPI) index which crossed the double digit mark in December 2012 to reach 10.56%.
The fall in WPI has been perceived as an encouraging sign and so there are increased expectations that the Reserve Bank of India (RBI) will cut rates in its next monetary policy. So far the central bank has been in no mood to oblige on account of high inflation. So it will be interesting to see what its next move will be when the inflation indices throw up such contrasting data.
The woes on the CPI front do not end here. Despite the higher numbers, there are many factors that have not been reflected in the December data on account of the lag effect. This means that the impact of these will be felt in 2013 so that consumer prices could rise much more this calendar year. For starters, it does not take into account the recent hike in railway fares which will show up in either the January or February numbers. Then there is the proposed hike in diesel prices, the increase in minimum support prices (MSP) and increase in wages. The latter more so in the aftermath of the violence at Maruti's plant at Manesar.
Assuming that growth does not pick up, all these indicators point to an increased possibility of stagflation (i.e. inflation and low growth) in 2013. For growth to ramp up, the government needs to ramp up productive spending towards areas such as infrastructure, education and the like. But for now its hands are tied as the fiscal deficit data shows. What is more, it has not been able to stick to its targets for bringing this deficit down. And with elections around the corner, the motivation to drastically bring down subsidies is low. While it may look to reduce this deficit by increasing taxes, that would be another dampener on consumption as purchasing power reduces. Thus, we would not be surprised i f 2013 turns out to be another challenging year for the Indian economy.
The fall in WPI has been perceived as an encouraging sign and so there are increased expectations that the Reserve Bank of India (RBI) will cut rates in its next monetary policy. So far the central bank has been in no mood to oblige on account of high inflation. So it will be interesting to see what its next move will be when the inflation indices throw up such contrasting data.
The woes on the CPI front do not end here. Despite the higher numbers, there are many factors that have not been reflected in the December data on account of the lag effect. This means that the impact of these will be felt in 2013 so that consumer prices could rise much more this calendar year. For starters, it does not take into account the recent hike in railway fares which will show up in either the January or February numbers. Then there is the proposed hike in diesel prices, the increase in minimum support prices (MSP) and increase in wages. The latter more so in the aftermath of the violence at Maruti's plant at Manesar.
Assuming that growth does not pick up, all these indicators point to an increased possibility of stagflation (i.e. inflation and low growth) in 2013. For growth to ramp up, the government needs to ramp up productive spending towards areas such as infrastructure, education and the like. But for now its hands are tied as the fiscal deficit data shows. What is more, it has not been able to stick to its targets for bringing this deficit down. And with elections around the corner, the motivation to drastically bring down subsidies is low. While it may look to reduce this deficit by increasing taxes, that would be another dampener on consumption as purchasing power reduces. Thus, we would not be surprised i f 2013 turns out to be another challenging year for the Indian economy.
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