A narrow outlook?

After shooting up to an eight-month high of 7.79 per cent in April, India's retail inflation substantially cooled down to 7.04 per cent in May — still remaining above the RBI's tolerance band of 6 per cent for the fifth straight month. Due credit must go to the Central government that slashed the excise duty on petrol and diesel by Rs 8 and Rs 6 respectively, apart from taking measures aimed at cooling off prices of iron, steel, coal, plastics and cement. The Reserve Bank of India (RBI) should also be praised for withdrawing from the accommodative stance and increasing repo rate by 90 basis points (bps) in two installments. The critical question that remains is how sustainable is this decrease in retail inflation figures? Current trends show, not much. Thanks to the excise duty cut, fuel inflation came down from 10.8 per cent in April to 9.54 per cent in May. Also, the inflation in transport and communication came down from 11 per cent in April to 9.54 per cent in May. Further cooling off effect of excise duty cut is expected to be seen in the June estimates. Economists are also attributing the moderation in retail inflation figures to the base effect of high inflation (6.3 per cent) in May last year. It must be noted that the cooling off effect of the excise duty cut may be limited by under-recoveries of oil marketing companies (OMCs). According to a report by Nomura, as on May 16, under-recoveries of diesel and petrol were Rs 12 and Rs 11 per litre respectively. High under recoveries are an indication that OMCs may not be willing to pass on the positive effect of excise duty cut to consumers on a sustained basis. It won't be wrong to conclude that the effect of excise duty cut on retail inflation may just be marginal and for a short duration. The argument that the present containment of retail inflation figures lacks sustainability is substantiated by several factors. It's an open fact that high inflation across the world is triggered by the disruption in supply chains — of both food and fuel among other things — due to the Russia-Ukraine war. The normalisation of inflation trend largely hinges on the abatement of the war which, presently, appears out of sight. The countries that have a substantial degree of direct trade in food and fuel with the war-torn countries are feeling more heat than India. As things stand today, international crude oil prices remain high and the value of Indian rupee recently touched an all-time low of Rs 78.03 against US dollar. Though the Consumer Food Price Inflation (CFPI) — which has been a major contributing factor to the soaring inflation — marginally recovered from 8.31 per cent in April to 7.97 per cent in May, it can hardly be considered a respite. While the rural food inflation witnessed a decline from 8.5 per cent in April to 7.76 per cent in May, the urban food inflation only climbed up from 8.09 per cent to 8.2 per cent. While the prices of essentials like vegetables, meat and fish, and milk products went higher, cereals saw just a marginal reduction. The crux of the matter is that food prices remain high and will likely torment common masses for months to come. So, as both the major contributors — food and fuel prices — are not showing signs of abatement, the path ahead for inflation containment is blinkered. The wide-ranging disparity in inflation estimates of Indian states confirms that a policy lapse at the fundamental level is also a factor behind high inflation rate. While Kerala, Punjab, Tamil Nadu, Delhi and Himachal Pradesh have managed to maintain their inflation rates below 6 per cent, several other states are faring well above the national estimate. It is true that improvement in fundamentals of the economy is not a day's game but a policy cohesion among the states can still bring some real respite. To sum up, reduction in India's retail inflation is a relief but not a solution. The government should build upon its efforts to ensure a more sustainable fix to the inflation problem.