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Are we at the start of a renewed downshift in inflation?
India’s consumer price inflation is the second highest in the world, after Venezuela. Since the inflation rate is fluctuating, it is difficult to predict if India is at the start of a renewed downshift in inflation.
In December 2012, inflation rate stood at 7.18 percent and this figure fell to 6.62 percent in January 2013. However, instead of decreasing further, India’s inflation rate went up again in February to 6.84 percent.
On a positive note, the rate of inflation in India in 2013 is much lower than in 2012, when the average inflation rate was above 7 percent.
Although inflation, on the whole, increased in February, the breakdown of the figure tells a different story. The national inflation comprises two elements - wholesale price index and non-food manufacturing inflation.
In February, the wholesale price index rose from 6.62 percent to 6.84 percent. On the other hand, non-food manufacturing inflation fell from 4.1 percent to 3.8 percent in February. The figures offer a ray a hope that inflation may ease in the next few months, in light of the fiscal consolidation efforts undertaken by the government.
The Reserve Bank of India has been reducing the cash reserve ratio and interest rates since January 2012, lowering the rate of inflation from 11 percent to 7 percent.
According to the governor of the Reserve Bank of India, D Subbarao, the organization will reduce interest rates even more if inflation continues to decline. Food prices, global commodity prices and demand pressures have an impact on inflation.
And in India, there is structural food inflation due to the changes in the dietary habits of the citizens. People have started consuming fewer cereals and more proteins due to an increase in the wages of the poorer segments of the society.
With people consuming more vegetables, meat, milk, eggs and fruits, food inflation has gone up. In addition, the declining rate of gold has propelled Indians to purchase more gold, leading to an increase in the import value of gold, placing additional burden on the country’s current account.
So, to reduce the overall inflation in the country, it is important to reduce the import of gold and increase the export value of the country instead. In addition, to reduce the gap of India’s current account deficit, the government needs to come up with policies that can attract investors to enhance the production capacity of the nation.
One way the government is trying to increase investments in the country is by reducing the interest rates. Last month, the Reserve Bank of India reduced the interest rates by 25 basis points, from 7.75 percent to 7.5 percent, to reduce the cost of borrowing.
It is hoped that investments will increase in the future; else, the government will impose higher taxes on the citizens to increase the reserves of the government.
It is too early to say if India is at the start of a renewed downshift in inflation. If there is less import of gold, fuel and an increase in the export value of products in the next few months, then we can safely say that inflation can be curbed.
However, if things continue the way they are now, we might be stuck in the vicious cycle of stagflation.