Retail inflation reached to 7.35 per cent in December 2019, registering a 1.81 per cent jump from November, showed official data released Monday. Soaring vegetable prices, led by onions, were to blame for the inflation ambush that breached Reserve Bank of India's upper limit (inflation) of 6 per cent last month.
Inflation has never been this high since July 2014, when it was marginally higher than December figure at 7.39 per cent. It has touched almost a six-year high--a worrying trend that reduces the possibility of an interest rate cut by Reserve Bank of India (RBI).
Since the central bank maintained an "accommodative" stance in its last policy review, there is a possibility of interest rates swelling as well. Rising interest rates are neither good for a reviving economy nor a demand-less market, especially when the unemployment rate is higher than what it was four decades ago.
It leaves the government with much to do as RBI Governor Shaktikanta Das already said that changes in inflation would dictate the Monetary Policy Committee's (MPC) next move.
While it would be interesting to see what the RBI does in its policy review, scheduled five days after the Union budget, many economists fear that the inflation trajectory could riddle fiscal plans ready for print.
RESPONSIBILITY NOW ON GOVT
The fresh inflation spike coupled with an estimated five per cent GDP growth in 2019-20 -- an 11-year-low -- makes the revival challenge even tougher for the government and the Ministry of Finance.
Members of Finance Minister Nirmala Sitharaman's party, the BJP, have already announced that she will present a "pro-people" budget. Meanwhile, many industry leaders have urged the government to increase spending in labour-intrusive sectors like manufacturing, construction and real estate.
However, with economists now expecting inflation to inch upwards after a marginal drop due to falling onion prices, the government may have to take a closer look at the situation. Financial services company Nomura already predicted that inflation will remain elevated in January as well. It added that RBI may decide to go for a rate cut only in the second quarter of 2020.
Care Ratings Chief Economist Madan Sabnavis said growth will have to be supported by government spending, at least till the Monsoon season. Sabnavis indicated that inflation could go up gradually till September before the situation improves.
TOO MANY CHALLENGES
At the moment, India is not only witnessing a period of demand slowdown but also rising inflation. Economists have termed the phenomenon as "stagflation". It is worth noting that unemployment also remains high during a period of stagflation.
Also Read: Retail inflation spikes from 7.35% to 5.54% in December, highest in six years
L&T Financial Holdings Group Chief Economist Rupa Rege-Nitsure told Reuters that the current "stagflationary phase is due to supply shocks in the food and fuel sectors and adverse base effect".
Consecutive months of rising inflation along with muted demand and unemployment have all emerged as key issues ahead of the upcoming budget. But the government, which was expecting some growth support from the RBI, will now need to push for a larger share of growth on its own.
Many economists including HDFC Bank Chief Economist Abheek Barua feel that the pressure is now on the government to pay more attention to growth, especially in the agricultural sector as it has been responsible for much of the inflationary hurdle.
For instance, the government can spend more on better food stock management to avoid any shortage or crisis of crops. However, the growth trajectory will also depend significantly on the Rabi output.
But the government has limited room to spend in the upcoming budget due to lower-than-expected revenue collections in 2019. A 22 per cent cut in corporate tax along with fired-up oil prices also played spoilsport.
Some experts including Nobel Laureate Abhijit Banerjee said the government needs to focus on growth as it is the only way to begin a solid economic recovery, even at the cost of letting fiscal deficit slip for a marginal period.
With economists predicting RBI to hold rates till at least the second quarter of 2020, Finance Minister Nirmala Sitharaman's second budget is expected to set the fiscal path for 2020.
Between falling GDP growth and higher inflation, the government will also have other issues to tackle including completion of its Rs 1.05 lakh crore divestment target, providing specific relief packages for key sectors and keeping investors' spirits high.
While budget is unlikely to resolve all economic hurdles immediately, the government should at least present a concrete economic recovery plan for the year apart from focusing on fresh reforms dedicated to boosting rural income, improving credit growth and maintaining fiscal stability.