Economic Highlight
New Delhi,
9 August 2021
Stagflation
Looms Large
RBI
PANEL FOR CUT IN TAXES
By
Shivaji Sarkar
Severe price rise and
plummeting consumer confidence is rattling the monetary policy management of
the Reserve Bank of India. Once again the Monetary Policy Committee (MPC) finds
the high petroleum taxes spurring prices of all commodities and inflation index
across the country. A dissent note on the price front has called upon to cut
all taxes on petroleum products, saying that bank expects inflation to touch
5.7 per cent in 2022 against the present 5.1 per cent.
The rising inflation
should have resulted in higher repo rates but the central bank has with
reluctance and caution held the rates back to 4 per cent to help the
government. Economically, it is not supposed to be a prudent decision, as it
further restricts the purchasing power capabilities. This means the industry
may not find a very conducive environment and the demand side will remain weak.
A look at the RBI Consumer
Confidence Survey for July reveals weakness in the bargaining powers of the
working class and high prices putting a squeeze on the non-essential spending,
a crucial factor for the socio-economic progress. The current situation index
(CCI) fell sharply from its March 2020 value of 85.6 to 48.5 in May 2021 and
has not recovered till July as per CCS findings between June 28 and July 9. The
survey indicates negativity about jobs, incomes and concerns about rising
prices. The bank is concerned because if the economy does not show a turnaround
it will have to dig into its reserves, a difficult reminder of the 1991 crash.
RBI Governor
Shaktikanta Das’s statement for its effort for recovery is significant. He states:
“The RBI remains in ‘whatever it takes’
mode with a readiness to deploy all its policy dimensions – monetary,
prudential or regulatory. Our focus on preservation of financial stability
continues. At this juncture, our overarching priority is that growth impulses
are nurtured to ensure a durable recovery along a sustainable growth path with
stability”.
The MPC fine print,
however, underlines worrying trends like stagflation threat for the country. A
stagflation is low growth with high inflation. The MPC might have retained the
GDP forecast for 2020-21 at 9.5 per cent, projected in the June meeting but MPC
members are seemingly more bearish in their outlook than they were earlier. The
MPC has revised downward of the second, third and fourth quarter projections
because of demand-side projections.
According to an educationist’s
observation, the demand-side problem is even reflecting on the university
admissions, particularly of private universities. The admissions are suffering
at all levels as parents have squeezed income and little to spare. This
indicates that a deep malaise is setting in.
Inflation is prime
concern of the RBI, according to its Deputy Governor Michael Patra. He says,
“It is important to bring that down”. The current assessment is that the
inflationary pressures during 2021-22 are largely driven by adverse supply
shocks. The MPC says that there is large amount of slack in the economy with
output below its pre-pandemic level. It hints at weakness in demand.
To support it one may
refer to the Purchasing Power Index. It remains below the critical threshold of
50, values above which signify an expansion in activity, compared to last
month. The Nomura India Business Resumption Index has also shown a marginal
fall in the last two weeks. The Nomura India economist has pointed to the
dissent of an MPC member against the accommodative policy rate stance.
The dissent note of
Raj Kiran Rai G, Chairman of industry lobby of Indian Banks Association (IBA)
and head of Union Bank of India, states, “RBI ‘nudges’ the governments at the
Centre and States to cut the high indirect taxes on fuel products to bring down
the pressure on prices. It is pertinent to note that
while the decision of the monetary policy committee for continuance of the
accommodative stance was unanimous in the June policy, it is not so in this
policy.” He underlined the building of the price pressures.
That is
vital. The growth remains uncertain. It fell to 4.04 per cent in 2019-20 from
6.53 per cent in 2018-19. In 2020-21, it plummeted to minus 7.25 per cent and
is expected to grow by 9.5 per cent. There are many doubts though. Even if it
grows by 9.5 per cent, it is to be noted that it is over a minus growth. The
actual growth at that level would be a mere 2.25 per cent.
The World
Bank (WB) has now slashed India’s GDP forecast 8.3 per cent as against its
earlier forecast in 2022 and may even plummet to 7.5 per cent and may fall to
6.5 per cent in 2023. It states, “The pandemic will undermine consumption and
investment as confidence remains depressed and balance sheets damaged.”
The World
Bank may not be off the mark. The pandemic has disproportionately affected
labour and the informal sector. The output gap is predicted by the MPC though
it is not confident about the growth. The International Monetary Fund defines
output gap as an economic measure of the difference between the actual output
of an economy and its potential output. In monetary policy terms, potential
output is also taken as the limit which can be reached without stoking
inflation.
The MPC does
not rule out 5.7 per cent inflation in 2021-22 fiscal, almost a per cent more
than what was predicted in April meeting. Even if this is true, this would be
the year of highest inflation since 2012-13. Consumer price index is at a high
at 6.16 per cent. With income losses it hits the demand to critical levels.
While bank lending is not picking up, the growth of bad loans spell trouble not
only or NBFC, the prime lender for the unorganised sector, but the whole of
Indian economy. If their ability to lend is curtailed due the surge in bad
loans, consumption and demand would weaken further.
This
might hit the banking sector as the RBI financial stability report (FSR)
estimates bad loans to touch 9.8 per cent by March 2022 from 7.5 per cent in
March 2021. It means lenders may see bad loan rising by Rs 1.3 lakh crore and
outgo of Rs 7000 to 9000 crore as interest payment.
The RBI
has given the prescription for the government to follow. If it follows the
steps to check inflation the economy may spur else more difficult days await
the nation. ---INFA
(Copyright, India News &
Feature Alliance)
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