Expect inflation to rise

by Manasi Swamy

In March 2021, inflation in the consumer price index was 5.5 per cent. This was higher than the 5 per cent inflation recorded in February 2021 which was in turn higher than the 4.1 per cent inflation in January 2021. But earlier, through most of 2020, inflation ranged between 6 and 7 per cent. Therefore, while inflation was rising in the first three months of 2021, it was much lower than it was in 2020. Going forward, the high inflation of 2020 provides a high base from which it may be difficult for inflation to rise even further easily in 2021-22.

But, that’s how drab statisticians may think. People do not seem to think that way. In March 2021, a record 58.4 per cent of respondents to RBI’s survey said that they expect inflation to continue to rise. Never in the last eight years have so many people believed that inflation was going to rise. Only 4 per cent believed that inflation would decline. We could tick that off by seeing that such views are often off the mark. But, with due respect to the base effect, there are a few rising threats to inflation on the horizon. We discuss these here.

There are at least four sources of inflationary pressures bubbling up. And, besides the statistical base effect there are no other reasons to keep inflation in control. Monetary policy has decided to wait and watch to let growth gain traction although the latter is challenged by a vicious second wave of Covid-19 that has caught India unprepared.

Before we discuss the factors that could cause inflation to rise in the coming months it is important to note that while the overall inflation in the first three months of 2021 has been low compared to the preceding months, core inflation has not seen any such fall. It has continued to rise steadily. While non-core inflation fell from around 8-10 per cent in 2020 to 2-5 per cent in 2021, core inflation continued to rise from around 5.5 per cent in 2020 to 6 per cent in February-March 2021. The slow and steady rise in core inflation indicates the presence of inflationary pressures in the economy.

The first risk to inflation is the resurgence of the virus. Over the past few weeks, the virus has spread across the country and infected an exceptionally large number of people. Nearly 3 million people were infected at the end of April 2021. Since 30 per cent of India’s population is employed, proportionately 1 million employed people and in all probability even more could be infected by Covid-19. These people could be either hospitalized or in isolation and, therefore, unavailable for work. Besides, those employed people who are primary caregivers for infected family members could also be unavailable for work. This, along with the gradual exit of migrant workers and the sporadic lockdowns can break down supply chains. The consequent disruption in movement of goods is the first inflationary risk.

RBI recognises this risk. Markets have started to reflect this as well. Prices of perishables have started rising. Prices of fruits and vegetables had increased by 15-16 per cent in April over their levels in March. Data of retail prices of essential commodities released by the Ministry of Consumer Affairs, Foods & Public Distribution shows that vegetable oil prices advanced in the range of 2.5 to 8 per cent in the first 28 days of April 2021 compared to their corresponding level in March 2021. Sugar prices rose by 3.2 per cent, milk prices rose by 2.9 per cent and prices of pulses rose in the range of 0.2 to 2.2 per cent.

Related to the resurgence of the virus is the phenomenon of shortages of oxygen, medicines, hospital beds, cremation or burial grounds, health care workers. Shortages also contribute to inflation. Some of these show up in inflation and some in black-marketing. Official statistics may or may not capture the inflation effects of shortages. But, households are facing higher inflation because of these shortages. The RBI survey on inflation expectations may be capturing this phenomenon.

The second threat to inflation is the prices of transport fuels. Petrol and diesel prices softened marginally by 0.6 to 0.7 per cent in April 2021 amid assembly elections in 5 states. These can be expected to rise once again in May 2021. Prices of Indian basket of crude oil that softened through March 2021 till mid-April 2021 on fears of oil demand from Asia weakening due to India’s Covid-19 resurgence, resumed their northward journey in the second half of April. On April 13, 2021, the Organization of Petroleum Exporting Countries (OPEC) raised its world oil demand forecast for 2021 by 190,000 barrels per day (bpd) to 96.46 million bpd from its March 2021 estimate. S&P Global Platts has projected oil prices to touch USD 70 per barrel by mid-2021, rising from their current level of USD 65.5 per barrel as global oil demand fundamentals improve and lead to substantial stock draws by August 2021. We expect OMCs to pass on any additional cost burden arising out of input price rise to the consumers through petrol and diesel price hikes, thereby contributing to a rise in retail price inflation. Besides the direct impact of this on inflation, it will also have the corresponding cascading effect on intermediate goods and services that consume these.

Third, the Indian rupee depreciated by 2.5 per cent to Rs.74.7 per USD in between March 2021 and April 2021 as foreign portfolio investors pulled out USD 1.3 trillion from Indian capital market. The RBI’s pledge to keep interest rates low by announcing purchase of government bonds worth Rs.1 trillion in the first quarter of 2020-21 weakened the sentiments further. Going forward, the rupee is expected to trade with depreciating bias due to excess liquidity, low interest rates, reducing spread between US and Indian bond yields and fiscal concerns.

Around 20 per cent of India’s aggregate demand is met through imports. Depreciation of rupee not only increases the landed cost of imports, but also encourages upward movement of domestically produced goods.

Fourth, commodity prices have been rising. A spike in iron ore prices led to an increase in steel prices which in turn has been the justification for automobile and domestic appliances raising their prices during the March 2021 quarter. In April 2021, Maruti Suzuki, Ford and Hero MotoCorp raised prices of their offerings in the range of 3 to 6 per cent. Steel prices are expected to rise further.

Prices of other intermediates such as vegetable oils, petroleum-based chemicals, plastic, polymers and natural rubber have also been on a rise. FMCG companies too raised prices of their offerings in March 2021 in the range of 5 to 12 per cent to offset the inflationary pressure built up from these key raw materials. The impact of this on headline inflation will be seen in 2021-22.

1. https://economicoutlook.cmie.com/kommon/bin/sr.php?kall=wshreport&&tabcode=001011005000000000&repnum=105312&frequency=M&colno=1&parnum=105311&parfrq=M
Unemployment Rate (30-DAY MVG. AVG.)
Per cent
9.1 +2.5
Consumer Sentiments Index
Base September-December 2015
49.1 -1.4
Consumer Expectations Index
Base September-December 2015
51.0 -1.1
Current Economic Conditions Index
Base September-December 2015
46.1 -1.9
Quarterly CapEx Aggregates
(Rs.trillion) Jun 20 Sep 20 Dec 20 Mar 21
New projects 0.96 1.42 1.17 1.62
Completed projects 0.28 0.74 0.84 0.92
Stalled projects 0.11 0.08 0.31 0.14
Revived projects 0.68 0.29 0.15 0.14
Implementation stalled projects 0.09 0.07 0.15 0.30
Updated on: 18 May 2021 8:28PM
Quarterly Financials of Listed Companies
(% change) Jun 20 Sep 20 Dec 20 Mar 21
All listed Companies
 Income -27.7 -6.3 1.6 15.8
 Expenses -27.9 -10.3 0.2 9.8
 Net profit -40.4 47.3 57.3 77.5
 PAT margin (%) 5.2 8.3 8.4 12.2
 Count of Cos. 4,404 4,404 4,378 547
Non-financial Companies
 Income -37.4 -10.5 0.2 20.4
 Expenses -37.7 -14.2 -0.7 14.8
 Net profit -55.9 31.5 53.6 66.8
 PAT margin (%) 4.5 8.1 8.8 12.6
 Net fixed assets 5.9 4.9
 Current assets 0.7 7.7
 Current liabilities -2.7 -5.6
 Borrowings 8.3 -8.0
 Reserves & surplus 4.2 16.8
 Count of Cos. 3,267 3,266 3,252 415
Numbers are net of P&E
Updated on: 18 May 2021 8:29PM
Annual Financials of All Companies
(% change) FY19 FY20 FY21
All Companies
 Income 13.4 0.0 -5.8
 Expenses 13.8 0.0 -6.9
 Net profit 15.2 -10.9 3.5
 PAT margin (%) 2.1 2.1 10.1
 Assets 9.8 8.1 2.4
 Net worth 8.5 4.4 0.7
 RONW (%) 3.8 3.5 11.8
 Count of Cos. 30,903 29,539 49
Non-financial Companies
 Income 14.1 -1.9 -6.6
 Expenses 14.3 -1.6 -7.7
 Net profit 21.7 -21.2 2.0
 PAT margin (%) 2.9 2.4 10.5
 Net fixed assets 5.6 9.4 -0.3
 Net worth 8.0 2.2 -0.1
 RONW (%) 6.4 4.9 13.2
 Debt / Equity (times) 1.0 1.1 0.1
 Interest cover (times) 2.3 2.0 21.1
 Net working capital cycle (days) 73 80 38
 Count of Cos. 24,728 23,541 40
Numbers are net of P&E
Updated on: 11 May 2021 3:39PM