Surging inflation complicates India’s pandemic recovery

21 June, 2021 12:00 AM printer

NEW DELHI: India’s surging inflation is adding to the country’s economic woes, presenting challenges for businesses and policymakers alike as analysts warn of risks that could prevent prices of essential goods easing in the near future.

Wholesale price inflation jumped 12.94 per cent in May, a near 30-year high, driven by soaring fuel prices, while retail inflation hit a six-month peak of 6.3 per cent as food and fuel costs rose, exceeding the central bank’s higher band and analysts’ estimates, according to official data released this month, report agencies.

“The risk of inflation turning persistent exists,” Anubhuti Sahay, head of economics research for South Asia at Standard Chartered, says. “[This is] especially because the rise in May’s consumer price inflation was driven by a broad-based surge, and if commodity prices stay elevated.”

A major factor driving the spike in inflation is elevated oil prices, which have been hitting multi-year highs recently. India is heavily dependent on oil imports and this has a knock-on effect on the cost of other goods, including an increase in transportation costs. Fresh lockdown curbs imposed during a deadly second wave of Covid-19 have also affected supply chains, putting upward pressure on prices.

“Inflation pressure may remain high ahead, with upcoming prints looking to be above the May print,” Madhavi Arora, lead economist at Mumbai-based Emkay Global Financial Services, says.

The surge in inflation is posing a challenge for policymakers, with the Reserve Bank of India (RBI) instead focusing efforts on supporting economic growth. The country’s economy has been battered by the second wave of the coronavirus, which has derailed what looked to be a promising start to a recovery after last year’s pandemic-induced recession.

Last week, the US Federal Reserve moved up its timeline for interest rate hikes as inflation in the world’s largest economy rises. The US central bank may now raise rates as soon as 2023, after saying in March that it saw no increases until at least 2024. India’s economy contracted 7.3 per cent in the April 2020 to March 2021 financial year, according to data.