Surging inflation complicates India's pandemic recovery

India's surging inflation is adding to the country's economic woes, presenting challenges for businesses and policymakers alike as analysts warn of risks that could prevent prices of essential goods easing soon.

Wholesale price inflation jumped 12.94 % in May, a near 30-year high, driven by soaring fuel prices, while retail inflation hit a six-month peak of 6.3 % as food and fuel prices rose, exceeding the central bank's higher band and analysts' estimates, according to official data released this month.

“The chance of inflation turning persistent exists,” Anubhuti Sahay, head of economics research for South Asia at Standard Chartered, says. “[This is] especially as the rise in May's consumer price inflation was driven by a broad-based surge, and if commodity prices stay elevated.”

A significant factor driving the spike in inflation is elevated oil prices, which were hitting multi-year highs recently. India is heavily reliant on oil imports and this has a knock-on influence on the expense of other goods, including a rise in transportation costs. Fresh lockdown curbs imposed throughout a deadly second wave of Covid-19 also have affected supply chains, putting upward pressure on prices.

“Inflation pressure may remain high ahead, with upcoming prints looking to be above the May print,” Madhavi Arora, lead economist at Mumbai-based Emkay Global Financial Services, says.

The surge in inflation is posing a challenge for policymakers, with the Reserve Bank of India (RBI) instead focusing efforts on supporting financial growth. The country's economy has been battered by the second wave of the coronavirus, which has derailed what looked to be always a promising begin to a recovery after last year's pandemic-induced recession.

The other day, the US Federal Reserve moved up its timeline for interest rate hikes as inflation in the world's largest economy rises. The US central bank may now raise rates as soon as 2023, after saying in March that it saw no increases until at least 2024.

India’s economy contracted 7.3 per cent in the April 2020 to March 2021 financial year, according to data. Meanwhile, the World Bank this month cut its growth forecast for the existing financial year to 8.3 per cent from its earlier projection of 10.1 %.

The pandemic's second wave prompted authorities to introduce fresh lockdown curbs, with fears of a third wave in the autumn. “India's recovery has been hampered by the major outbreak of any country since the start of the pandemic,” the Washington-based lender said.

Faltering monetary growth leaves the RBI with little leeway to raise interest levels to bring inflation under control since it would raise the price tag on borrowing.

However the dilemma for policymakers is that soaring inflation can hamper a pick-up in the economy, particularly as consumer price inflation has breached the RBI's upper threshold of 6 %.

“High inflation amid low growth impacts disposable incomes and so aggregate demand,” Ms Sahay says. “It gets the potential to delay the healing process.”

Many companies are struggling amid the pandemic's impact and steep inflation is making profitability more challenging. If inflation remains elevated over the coming months, the problem will worsen for most companies, analysts say.

“Some have absorbed the purchase price rise, some have passed it on to customers plus some are waiting and watching,” Naved Patel, founder and director of Mirepoix Hospitalities, which has a restaurant in Mumbai, says. “We've been affected by the rise in the most basic products: vegetables, cooking oil and pulses. Restaurants are in a miserable situation.”

"The spending capacity of the customer will [also] be low," Mr Patel adds.

Rising inflation also means he has to increase his employees' wages, which is eating into his profits. Mr Patel may haven't any choice but to pass the bigger costs to customers if inflation persists, which he says surpasses reducing portion sizes.

It comes as the hospitality industry is definitely feeling heat from the fallout of the pandemic, exacerbated by the most recent massive wave of infections.

“In the last couple of months customers have fallen and our profit margin was already nullified,” Mr Patel says. “Few of the big brands inside our industry can survive this inflation but smaller brands might plunge.”

There are, however, some factors on the horizon that could help to ease inflationary pressures.

Daily coronavirus infections are on a downward trend weighed against the peak of the second wave in May. Which has prompted state governments to begin easing Covid-19 curbs and allowing more business activity to resume.

“With declining infections, restrictions and localised lockdowns across states could ease little by little and mitigate disruptions to provide chains, reducing cost pressures,” according to the RBI's minutes of its June monetary policy meeting, released on Friday.

Expectations for normal rains this season through the monsoon season, which has already been under way, also bodes well for easing of food prices because good rainfall contributes to bountiful crops, the RBI adds in its June meeting minutes.

However the central bank warns that “the rising trajectory of international commodity prices, especially of crude, as well as logistics costs, pose upside risks to the inflation outlook”.

It also notes that “uncertainties remain” as a result of the likelihood that India could be hit by a third wave of infections this season.

“A crucial question is the extent to that your price jump will reverse as lockdowns reverse," Sonal Varma, chief economist for India at investment bank Nomura, says. “Our judgement is that prices are downward rigid in India and, as such, only the main price rise will reverse when lockdowns are fully relaxed in coming months.”

However, the government may need to intervene as the central bank's hands remain tied, some analysts say.

“We don’t see any immediate response from RBI on the inflation front given the priority accorded to the revival of the growth impulses,” Suman Chowdhury, chief analytical officer at Acuité Ratings and Research, says.

“Given the stress that the next wave of Covid has generated on the livelihoods of a big portion of the Indian population, some action should be expected on price control of the foods and retail fuel if the same continues to stay high for an extended period.”

The government may “need to take suitable measures to regulate inflation of food products such as for example edible oils and pulses and retail fuels to mitigate any longer-term structural risks to inflation”, he says.

One option could be for the federal government to consider a reduction of the import duty on cooking oil, Mr Chowdhury adds.

Addititionally there is scope for the central and state governments to lower high taxes on petrol and diesel to help ease fuel costs, analysts say.

However, a cut on taxes on retail fuel products can only just help “up to point, especially in a backdrop when commodity prices are rising”, Ms Sahay says.

“A bigger relief, however, can emerge if global commodity prices' relentless rise sees some kind of a correction."

When there is no let up in rising commodity prices, including fuel, metal and edible oil, this may push the RBI “to carefully turn less accommodative [hike interest rates] sooner, even before the growth recovery catches the required degree of momentum”, Ms Sahay says.

High inflation also offers the potential to negatively impact the bond market and the worthiness of the rupee, she adds.

For the present time, however, as India's economy sputters amid the pandemic, growth concerns remain the immediate worry, overshadowing the country's significant inflation challenges.

“We think as of this particular juncture, policymakers will probably remain squarely centered on monetary growth,” Ms Sahay says.