An uneven K-shaped recovery in economic growth is also fuelling a similar trajectory for inflationary dynamics in India, with food and rural price rise outpacing the inflation in other goods and services, and that faced by urban consumers, respectively, HSBC researchers said on Tuesday.
There has been much debate over India’s recovery since the pandemic being driven by more demand for higher-end goods and services while mass consumption items preferred by lower-income households have seen a relatively sedate scenario. Apart from the dichotomy between rural and urban inflation, and food prices compared with other goods, HSBC pointed to goods inflation being higher than that for services and input prices rising higher than output prices.
“Perhaps inflation and growth dynamics were never meant to differ,” said HSBC’s chief economist for India and Indonesia Pranjul Bhandari. “The same shocks that are driving the variance in growth, like the pandemic and climate change, hurting some groups more than others, are also likely driving the variance in prices,” she added.
In her report titled “India’s K-shaped inflation: What does it mean for policymaking?”, Ms. Bhandari said the government may need to be more sensitive about the impact of policy changes across different groups already reeling under supply-side shocks and any reforms may need “careful explaining and planning”.
With supply shocks becoming more frequent, monetary policymaking and reforms may need to adjust, she said, noting that the Reserve Bank of India may find a little bit of room to ease monetary policy if rains pick up and lift sowing, leading to an eventual softening in food inflation. The leeway to cut interest rates should come up even if medium-term pressures from “recurring and overlapping” climate related events persist, she suggested.
