Economy under pressure

INDIA’S wholesale price inflation has soared to a four-and-a-half year high because of costly fuel, food and manufactured goods. This gives credence to the fear of another hike in interest rates by the Reserve Bank of India (RBI) during its monetary policy review next month. Although the RBI considers retail inflation to make changes in its policy rates, the 54-month high wholesale price inflation would put greater pressure on the central bank. The RBI had raised the repo rate by 25 basis points last month after the consumer price index (CPI) had breached the 4 per cent comfort threshold. Since then, retail inflation has moved up to a five-month high at 5 per cent, which is only one percentage point lower than the alarm levels. It appears that the RBI has no option but to raise interest rates for the second time in two months to contain inflation and protect the poor from price rise. It appears that industry’s expectation of a rate cut will not be realised in the near future. 

The RBI’s move to hike interest rates will dampen the spirit of industry, which has barely recovered from the double whammy of demonetisation and the ill-prepared GST. The move will adversely impact India’s growth. In its latest report, the International Monetary Fund (IMF) has trimmed its growth forecast for India by 10 basis points to 7.3 per cent for 2018-19, and by 30 basis points to 7.5 per cent for 2019-20. The main reasons for the downward revision are the spiralling impact of higher fuel prices that would squeeze domestic demand and the overcautious monetary policy that would choke investments.

The RBI is bound by its mandate to keep inflation in check. This augurs well for the BJP government at the Centre which has to seek a fresh mandate in less than a year. The government has already announced higher minimum support prices (MSPs) for Kharif crops, which will have an inflationary impact. It is expected that the government will announce several popular schemes ahead of the 2019 General Election to woo voters, which will further increase the country’s fiscal deficit and eventually affect economic growth. The only saving grace can be a good monsoon. The government should refrain from making popular announcements recklessly and putting the country’s growth momentum at risk.