India’s economy faces increased risks of stagflation, which may slow down the effectiveness of monetary and fiscal measures adopted by the central bank and government, Acuite Ratings said.
The economic trend of stagflation is marked by rising inflation and falling GDP growth.
The ratings agency said that the uncertain outlook on inflation in the short-term has already led the Reserve Bank of India’s Monetary Policy Committee (MPC) to hold the interest rates in August and has also diminished the likelihood of any further rate cut in the near term.
In a report, Acuite said that immediate steps need to be taken to bring down food inflation, “the higher levels of which have already started to spill over to core inflation”.
“India’s consumer inflation has increased to 6.93 per cent in July 2020, a bit sharp and unexpected rise of 70bps (MoM) over that in June; since December 2019, CPI print has been on an overdrive and has been uncomfortably high over the 6 per cent upper limit set by the MPC,” the report said.
“Even though an unfavourable base effect is also playing an important role in shaping the inflation trendline, food inflation (CFPI) has been the primary driver of the CPI trajectory and has mostly hovered over 8 per cent over the last nine months since October 2019.”
According to the report, supply and logistical bottlenecks arising from the prolonged and intermittent lockdown in certain parts of the country have continued to keep food inflation high despite a good agricultural output over the last two seasons.
“The animal protein segment i.e. meat, fish, eggs and milk, edible oil, vegetables and pulses have seen double digit inflation in July; limited operations of APMCs in the lockdown period, import challenges along with excess rains or floods have all led to a disruption in the supply chain of agricultural products,” the report said.
“Further, persisting high food inflation along with shortage of labour have started to have a rub-off effect on prices of non-food products and services or core inflation; which has risen by 50 bps to 5.6 per cent in July 2020 from 5.1 per cent in June 2020 and 4.1 per cent in last July.”