Rising commodity inflation a threat to Economic recovery

As India strives to rebuild an economy hit by the pandemic, twin headwinds from rising commodity inflation and low capital expenditure by enterprises remain worrying obstacles. Though data for retail inflation in December showed food prices are cooling down, commodity prices worldwide have started rising as the global economy, especially China’s gargantuan one, starts coming back to life.

Its huge demand for iron ore, steel, lithium and a host of minerals as it once again ratchets up production has already heated up global prices. So much so that demands have been raised within India to stop exporting ore to Beijing to stall the price rise. Several sectors like automobiles and capital goods that are 
still struggling to recover have been hit by the price rise and are scared that demand would be hit in turn if they pass on higher input costs to consumers. 

Besides this, the worry is that the huge amount of money printed to stave off the ill effects of Covid on the economy will also push up prices. India’s money in circulation went up from Rs 24.47 lakh crore in end-March 2020 to Rs 27.7 lakh crore as on 1 January 2021, according to the RBI. Globally, the G20 countries printed far more money—some $11 trillion all together—that was pumped into the global economy as stimulus.

Possibly more worrying for India’s growth recovery story is the low capital spending by its listed firms. Spending on capital expenditure by these companies was at a low of just Rs 85,000 crore in the December quarter, about a fourth of the capex levels in the January-March 2020 quarter. The low spending not only reflects the poor financial muscle of India Inc. but also the fact that for the most part, their capacity utilisation is still below normal.

The way out is as complex as the problem. On the one hand, the RBI and the Centre will have to keep an eye open for the kind of inflation that could dampen growth. On the other, the Centre will also have to push capital spending in the state sector in the upcoming Budget to make up for a lack of spending by private enterprises. Without these two steps, the green shoots of recovery we are now witnessing may well fade away.