Is high inflation really due to supply disruptions? India can’t ignore high prices for long

The unwarranted high inflation has come as a surprise to the economy, even as India goes through the first technical recession in four decades in the first half of the current fiscal year 2020-21. The headline inflation surged to the highest in six-and-a-half years, while the core inflation rose to the highest in nearly two years amid the recession. The market expects headline inflation to ease to 4.2 per cent in Q4 from 6.6 per cent in Q2 FY21, and below 4 per cent in H1 of FY22. However, brokerage and research firm Motilal Oswal said in a report that the inflation could stay at nearly 6 per cent in December 2020 and January 2021, before rising back to 6.5 per cent by March 2021, and staying at nearly 6 per cent till September 2021.

India is among the very few major nations in the world with higher inflation in October, compared to the pre-COVID levels while the rise in core inflation is also the highest among 21 major economies. The report highlighted that blaming the supply or logistics constraints for higher food inflation would not be sufficient as if only supply constraints are responsible, how is higher inflation missing in a few food items, weak in other food items, and very strong in some.

Further, it is underlined that while the contribution of food items has fallen by over 100 basis points, core inflation has risen substantially and led to higher headline inflation. Though it is recommended to ignore the inflation risks at this stage,  the forward-looking inflation-targeting RBI may find it extremely difficult to ignore these trends for long and maintain its credibility, unless there is a sharp and sustained fall in the headline inflation towards 5-5.5 per cent by March 2021, and further towards 4 per cent by mid-FY22, the Motilal Oswal report noted.

Meanwhile, it is suggested that if headline inflation is closer to around 6 per cent, the mood could change quickly and inflation will become a concern sooner than later. Higher inflation has serious repercussions for various segments ranging from rural to the urban sector, borrowers to lenders, and investors to savers in an economy.