Welcome back to last year

RBI released the Mid Quarter Monetary Policy review last week, and it reminded me of the mid year review done about a year ago. By now you know that the Repo rate has been increased to 8.25%, and that the RBI is still worried about the high inflation, and has raised the rates to continue with their stance earlier.

You probably also remember the troika that was talked about in the last review that could adversely affect the growth or inflation situation.

These were:

  1. Bad Monsoon
  2. Commodity Bubble or Collapse
  3. Eurozone debt crisis assuming a full blown proportion

What’s interesting is that out of these three factors – bad monsoons are the only ones that have spared us. We have had a good monsoon, and record food production is expected this year, but at the same time food inflation is close to double digits (as the report puts it).

What’s more, we are not coming off a low base, these numbers have been high for quite some time, and food prices have just gone north for quite some time now.

Why aren’t prices moderating then? Perhaps reading something from the second quarter review LAST year will throw some light on it.

Further, notwithstanding some moderation, food price inflation has remained persistently elevated for over a year now, reflecting in part the structural demand-supply mismatches in several commodities – besides protein sources, oilseeds and vegetables also show this pattern. Given the changing consumption patterns and as yet inadequate supply response, food price inflation is becoming increasingly structural in nature. Further, even as non-food manufacturing inflation has indeed moderated, it still remains above its medium-term trend.

Now look at an excerpt from one year later:

Food inflation is at near-double digit levels, despite normal monsoons, underlining the fact that it is being driven by structural demand- supply imbalances and cannot be dismissed as a temporary phenomenon.

Isn’t it incredible?

Imagine what would happen if the monsoons were bad.

Till last year food inflation was the number one worry, but that has changed into more “generalized inflation” this year, and this is not helping anyone.

Unfortunately, the global recovery has sputtered, the situation in Europe is still very unclear, and crude prices rose (before they fell) making the situation worse this year.

But the food situation is depressing because it is so well documented, and has been talked about for such a long time, and still no progress have been made on it. I wonder if we will still be seeing the same thing one year down the road.

7 thoughts on “Welcome back to last year”

  1. Had read this sometime back but your article reminded me of it:
    In the period that Einstein was active as a professor, one of his students came to him and said: “The questions of this year’s exam are the same as last years!” “True,” Einstein said, “but this year all answers are different.”

    Irrespective of whether knife falls on watermelon or watermelon falls on knife , poor watermelon will get cut. Whatever the reasons are the common man (and I am referring to all the people of India infact the world..for we are not decoupled..) will be rather is being hurt. “Mehangai maar gayi Mehangaai maar gayi”

  2. An interesting explaination I read somewhere was that inflation starts declining only when the latest GDP growth is lower than trend GDP growth. Trend GDP growth being 7%, the current growth rate is still a bit higher. So as and when, the economy starts slowing substantially behind the trendline, there will be impact on inflation. Also, impact of monetary policy on inflation takes places with a time lag, its not instant. Infact in my opinion inflation numbers in Jan-March period will undergo considerable decline due to i) cumulative impact of all the monetary polic moves and ii) base effect. Then attention will be back on stimulating the economy.

  3. The inflation numbers make us all worry but I dont think increase in key rates by RBI is doing any good more than damage. When people have got so much of black money to spend, whats the point in increasing the repo rate 12 times in 18 months.

    1. Black money is more prone to erosion ( in Real or purchasing power terms) as it does not earn any interest (assuming we are talking of liquid black money here & not real estate holdings earned out of black money).

    2. I think the stance they are taking is let the economy slow down now due to these actions, but if there is another recession globally, that will also mean RBI has a lot of room to move interest rates downwards and help the economy at that time.

  4. Next inflation numbers should be in double digits because of rupee depreciation, the effect of which will be felt now. Even, food inflation would not spared because India imports around 50-60% of its crude edible oil requirements, which will rise significantly. Given, the news of good monsoon, would be interesting to see how will the agricultural output be in the Kharif season, and whether it has any impact on inflation in next 2 quarters. The structural problems in my opinion are more to do with poor governance and supply chain management, rather than demand supply mismatches itself.

    1. Supply chain management is the big big component of this and food rotting has also been so well documented for so many years that it’s a pity that nothing has been done for these decades.

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