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Double-digit food inflation, growth contraction; it's getting worse

Mini

Food is the culprit, but it's not onions this time. There is big protein inflation. Pulses, milk, meat and eggs all of them are between 10-16 percent. And these are not one-off they, normally stay once the prices start rising.

Retail inflation for January has inched up to a shocking 7.6 percent against the expectations that it will cool off from December’s 7.3 percent reading to at least 7.2 percent. As usual, food inflation is once again the culprit coming in over 13 percent. What's worse is even core inflation, which excludes food and fuel, has climbed. On the other hand, growth is declining with December’s Index of Industrial Production (IIP) showing a contraction of 0.3 percent.
Nothing can be worse for an economy than rising inflation at the same time growth is falling. First, the inflation numbers as they are mandatory to be set at 4 percent by the MPC, we have got a second continuous month of inflation coming at 7.6 when the expectation was that it could have peaked off from the 7.3 that we saw in December.
Food is the culprit, but it's not onions that is the most important thing. The onion inflation has come down but there is big protein inflation. Pulses, milk, meat and eggs all of them are between 10-16 percent and these are not one-off they normally stay once the prices start rising.
The core inflation, which is excluding food and fuel, have gone up as the telecom prices have been increased and there is a minor railway price increase and that is why you are seeing transport and communication also contributing to this core inflation. These again don’t go away in a hurry.
December number that we got for industrial growth is bad all over. Overall manufacturing itself is minus 1.2. We thought we would just start ticking higher as we saw coal and power starting to improve in the month of December.
But the overall numbers look rather bad and especially when you look at the capital goods and consumption, capital goods is a minus 18 percent contraction as if that was not enough, consumer durable is at minus 6.7 and even consumer non-durable is in minus and is in contraction. That is a sever crimping of consumption in the country.
The Reserve Bank of India has tried to work around the monetary policy and provided lower lending rates in the banking industry. But that cannot go on for long. If inflation is higher than 7 percent for one year down the line, interest rates have to be above the inflation. Or why would anyone save? You cannot reduce yields when inflation is higher.
And in the face of rising inflation, the government will not be allowed to reduce interest rates for various schemes such as Kisan Vikas Patra, NSS. This is going to be an enduring problem at least for the next few months.
NEW DELHI:INDEX OF INDUSTRIAL PRODUCTION:PTI GRAPHICS(PTI2_12_2020_001011B)

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