A multi-pronged challenge
India is grappling with a surge in inflation that is taking a heavy toll on people’s purchasing power. It is also affecting consumer sentiment, and will likely thwart the hopes for an interest rate cut in the immediate future. Retail inflation, according to the National Statistical Office (NSO), hit a 14-month high of 6.21 per cent in October, while food inflation breached double digits for the first time since July 2023, soaring to a staggering 10.87 per cent. The spike is primarily driven by the escalating prices of essential food items including vegetables, oils, fruits, and proteins—all of which saw significant increases due to both domestic factors and global market dynamics.
At the core of this inflationary surge has been the exponential rise in vegetable prices, particularly tomatoes and onions. The hike is likely fuelled by unseasonal rains and an extended monsoon season. October witnessed vegetable inflation jump to a striking 42.18 per cent from 35.99 per cent in September, marking the highest rise in nearly 5 years! The prices of edible oils also saw a dramatic increase to 9.51 per cent. Making matters worse, global price rises and the recent hike in customs duties have had a cascading effect as well. The rural population, which faces higher inflation rates than urban areas, has been particularly hard hit. In October, rural food inflation rose to 10.69 per cent, compared to an already high 9.08 per cent in September, with rural retail inflation at 6.68 per cent. Urban consumers, meanwhile, faced an even sharper spike in food prices at 11.09 per cent. This divergence indicates a widening inflationary gap between rural and urban India, reflecting the limited capacity of rural households to absorb price shocks.
The Reserve Bank of India (RBI), which has conventionally set an inflation target range of 4 per cent ± 2 per cent, is facing a challenging scenario with the current retail inflation exceeding the upper band. The RBI’s recent shift in monetary stance to a ‘neutral’ position does not, by any account, imply an imminent rate cut in the December policy review. The central bank has maintained its policy rate at 6.5 per cent for 20 consecutive months. It has opted to exercise caution amidst a volatile economic landscape. Governor Shaktikanta Das has also asserted in clear terms that given the current inflationary pressures, a rate cut is unlikely. This may prolong the strain on consumers and businesses, but there doesn’t seem to be any other way out. Beyond the food sector, inflationary pressures have seeped into other categories as well. Importantly, personal care costs alone surged by 10.99 per cent, up from 9 per cent in September. This broad-based rise is a sign of creeping inflation across various segments, which could intensify if not managed promptly. It also risks taking the core inflation on an upward trajectory.
The government, of course, has a few fiscal policy tools at its disposal to address the inflation conundrum. For instance, considering temporary tax relief on essential imports or subsidising transportation costs for perishable goods could help soften the blow for consumers. Additionally, stabilising the prices of critical items such as vegetables, oils, and cereals through improved supply chain management and storage infrastructure can mitigate inflation volatility. Encouraging food processing units could also provide a buffer against price spikes in raw food items. In parallel, structural reforms in India’s agricultural sector are essential to tackle food inflation in the long run. Enhancing domestic production of edible oils, expanding the scope of government-backed warehousing facilities, and promoting sustainable farming practices are critical to reducing reliance on imports and safeguarding against global price fluctuations. Moreover, investment in agri-tech solutions to predict weather patterns and manage crop cycles could provide much-needed stability to food supply. India’s inflationary struggle calls for a coordinated policy response. As household budgets stretch and purchasing power weakens, consumer confidence and private investment are likely to take a hit. This could have broader implications on economic growth. Thus, the government and RBI must carefully balance inflation control with growth objectives, potentially deferring any rate cut until a more sustainable inflationary cooling is observed.
