How low inflation is a dilemma for India

Falling rural incomes and farm distress have cast a shadow on one of the key achievements of the Modi government.

How low inflation is a dilemma for India

Falling rural incomes and farm distress have cast a shadow on one of the key achievements of the Modi government.

 

Low inflation in India is proving to be a dilemma for the Modi government weeks ahead of the general elections, a report in HinduBusinessLine online said. This is so because the subdued inflation has come at a cost. Normally, a government just ahead of polls, especially in emerging economies like India, would count controlling inflation as an achievement, but Modi has been restrained about this achievement, said the report.

The reason being that the low inflation has been driven by falling food prices, cutting farmers’ incomes and pushing up debt levels. In the scenario where about 800 million of the country’s 1.3-billion population depend on farming for their livelihood, the subdued inflation is not much reason to cheer.

The report quoted Priyanka Kishore, head India and South-East Asia Economist at Oxford Economics in Singapore as saying that while Modi has managed to keep inflation under control, it has come at a cost. Falling rural incomes and farm distress have cast a shadow on one of the key achievements of the Modi government.

However, the slowdown in inflation raises the prospect of another interest-rate cut in April, the report said, adding that it will provide a much-needed boost to the economy. 

Though inflation remains much below the Reserve Bank of India’s medium-term target of 4 per cent, recent data showed an acceleration in price-growth in February.

A more-than-expected pickup in inflation and stable core is likely to make the monetary policy committee stay on the gradual rate-cut path rather than aggressive front-loading, Citigroup Inc economists, led by Samiran Chakraborty, said in a note. “Our base case remains for a 25 basis-point cut in April and possibly June too,” media report quoted Chakraborty.

Notably, inflation has more than halved under Modi government, averaging 4.8 per cent since 2014. In contrast, consumer-price growth averaged more than 10 per cent during 2009-2013.

The report quoted Pranjul Bhandari, chief India economist at HSBC Holdings Plc as saying that the introduction of Goods and Services Tax in July 2017 helped bring down food transportation costs, while bumper harvests, both at home and abroad, helped keep food prices tame.

Expectations of back-to-back rate cuts after February’s surprise 25 basis-point rate reduction are growing as inflation is showing little signs of gaining traction toward the RBIs target and the economy is performing below its potential, the report said.

A separate report on Tuesday showed growth in industrial production slowed to 1.7 per cent in January from a revised 2.6 per cent in the previous month, the report said.

RBI Governor Shaktikanta Das, who is seen favouring monetary policy easing, has flagged concerns about weaker growth, saying benign inflation conditions make it easier to lower rates and give a boost to investments at a time when global risks are rising, the report said.

Source: https://www.thehindubusinessline.com


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