Given the recent hike in diesel prices, and the promise of one more such each month for the next two years, chances are RBI’s monetary policy statement on Tuesday will refer to this as one of the underlying inflationary pressures in the months ahead. It will probably do the same when it comes to the renewed pressure on global crude prices now that there is an improvement in economic prospects in both the US and China. Then there’s the fact that consumer inflation is back to double digits.
Even so, there can be little doubt inflationary pressures have hugely eased. If wholesale inflation remained at around 10% levels for each month of FY11 and eased to the 7.5% level by the last quarter of FY12, this came down further to around 7.2% in the third quarter of FY13—and the drop in Q3 inflation numbers isn’t due to a high base in the same quarter of FY12 either since inflation had started winding down by then. Indeed, if inflation has remained at even the level it has, it is because primary articles (with a 20% WPI weight) are seeing inflation rise. In terms of RBI’s definition of core inflation that strips away food products within the manufacturing space, this is down to 4.2% which is just a bit higher than the central bank’s stated comfort level of 4%. None of this, of course, comes as a surprise given that we’ve had positive growth in the index of industrial production (IIP) in just 2 of the last 8 months to November. And in the case of October IIP where an 8.3% growth stunned everyone, this was due to the fact that October 2011 IIP actually contracted 5%. Early bird results for 224 companies show top line growth at the lowest in several quarters—in the consumer space, Hindustan Unilever saw just a 5% volume growth and commercial vehicles firm Ashok Leyland saw an 18% fall in net sales.
The net impact on future inflation, of course, will depend on government policy. The curious policy of not unloading buffer stocks that are 3 times what is required, for instance, has kept cereals inflation at 17-18% levels over the last 3 months and primary articles inflation at near double-digit levels. The government has started to act, a bit, on supply bottlenecks, though it has to be said the Cabinet Committee on Investments (CCI) has yet to even meet and it is a hugely watered down version of what was promised. Fiscal consolidation looks a bit better with the finance minister cracking down on expenditure but a large part is in the promised phase—it’s not at all clear the R1 lakh crore diesel subsidy will be attacked as regularly and systematically as the oil minister has said and, so far, the oil PSUs have given away more by way of LPG subsidies than they have taken by way of raised diesel prices. In which case, it is likely RBI will signal its intent with a 25 bps cut and wait to see what the Budget brings—a full-fledged Food Security Bill or a staggered one tempered by an astute finance minister.