Rising global inflation and how it will impact India

The global economy is grappling with increased prices, leading to fears of an economic recession. The US, Europe, and Japan have all reported high inflation. Experts believe that the Russia-Ukraine war along with COVID-19 shutdowns in China is elevating the risks of a recession. 

India, needless to say, is not immune to global inflationary pressures. India's retail inflation, as measured by the consumer price index (CPI), rose to a 17-month high of 6.95 per cent in March. Inflation in the food basket was 7.68 per cent in March, a significant rise from 5.85 per cent in the preceding month. Moreover, food prices are expected to remain elevated in the backdrop of supply chain problems — a fallout of the Russia-Ukraine war — due to a disruption of global grain production, supply of edible oils and fertiliser exports, according to the Ministry of Statistics and Program Implementation.

Also read: Retail inflation surges to 6.95% in March, above RBI comfort band for third time

During the MPC meeting announcements, RBI Governor Shaktikanta Das said, "Protracted supply disruptions have rattled global commodities and financial markets. Given the significant share of two economies engaged in the war in global production and exports of key commodities like oil and natural gas, wheat and corn, palladium, aluminium and nickel, edible oil and fertilisers.”

Russian President Vladimir Putin foresaw this. "I can assure you, when people face rising prices of petrol, food, unprecedented inflation rate – it will impact domestic political processes. They wanted very much that everything what is happening would impact domestic political processes in Russia – they always made that kind of mistake, without understanding that when faced with difficult conditions Russian people always unite," he had said. 

India's battle 

The CPI data is an affirmation of what Indian markets were complaining about recently. Reports stated that lemons – a staple during warm Indian summers – had touched Rs 300-350 per kg at Delhi’s Lajpat Nagar market. While lemons were short in supply due to the destruction of crops by a cyclone in Gujarat, prices of other items shot up due to transportation costs. Tomatoes were in the range of Rs 40-45, while onions were for Rs 40 per kilo. Edible oil prices were also elevated, and Governor Das said that edible oil price pressures are likely to remain elevated in the near term due to export restrictions by key producers as well as loss of supply from the Black Sea region.

Also read: Vegetable prices shoot up in Delhi-NCR; lemon rates past Rs 300/kg

As the CPI data shows, inflation in 'oils and fats' in March soared to 18.79 per cent as the geopolitical crisis due to the Russia-Ukraine war pushed edible oil prices higher. Ukraine is a major exporter of sunflower oil. In vegetables, inflation quickened to 11.64 per cent in March while in 'meat and fish' the rate of price rise stood at 9.63 compared to February 2022. 

Now, transportation costs have risen due to rising fuel prices. Since March 22, there have been 14 revisions, leading to an increase in petrol and diesel rates by Rs 10 each. Petrol in Delhi and Mumbai are at Rs 105.41 and Rs 120.51, while diesel is at Rs 96.67 and Rs 104.77 per litre. Fuel prices have not been hiked for the past seven days. 

Also, the government announced on March 31 that the prices of domestic natural gas will be $6.10 per MMBtu – double from $2.9 per MMBtu, which was the price when the announcement was made. The new price became applicable from April. The new price is the highest so far from 2014.

Liquefied petroleum gas (LPG) prices for commercial cylinders were also hiked by Rs 250 starting in April. A 19-kg commercial cylinder costs Rs 2,253 in Delhi, while it costs Rs 2,205 in Mumbai. A 14.2-kg non-subsidised LPG cylinder costs Rs 949.50 in Delhi. The prices of CNG and PNG also saw hikes. 

And global oil prices climbed on Wednesday due to concerns over sliding output in Russia which has been hit with sanctions. Fears over tightened supply abound after Moscow said that peace talks with Russia hit a dead end. Brent crude futures rose 59 cents, or 0.6 per cent, to $105.23 a barrel at 0053 GMT, while US West Texas Intermediate (WTI) crude futures jumped 60 cents, or 0.6 per cent, to $101.20 a barrel.

Russian oil and gas condensate production dropped below 10 million bpd on Monday – its lowest since July 2020 – amid sanctions by multiple countries hampering trade. 

Europe and the US have also urged India to cut down on Russian energy imports. But Minister of External Affairs S Jaishankar pointed out to European and US representatives on separate occasions that what India imports from Russia is minuscule, compared to what the West imports. It is also minuscule compared to the country’s total energy imports.

Also read: India’s monthly oil purchase from Russia less than Europe’s in an afternoon: Jaishankar

Global woes

Apart from the lowdown on India’s prices, why experts believe a recession is likely is because of the US' record inflation. The Labor Department said on Tuesday that its consumer price index jumped 8.5 per cent in March – the biggest year-over-year increase since December 1981. Prices have gone up due to bottlenecked supply chains, robust consumer demand and disruptions in the global food and energy markets, exacerbated by the Russia-Ukraine war. 

The average price of a gallon of gasoline in the US is $4.10, up 43 per cent from a year ago, though it fell back in the past couple of weeks. The escalation of energy prices has led to higher transportation costs, which has made goods and components expensive for consumers. 

The spiralling prices came after the US, as well as global economies, rebounded at a breakneck pace following the coronavirus recession. The recovery was also fuelled by government spending. The fast rebound in activity and surging consumer demand led businesses and ports to struggle to keep up, resulting in shipping delays and price hikes. 

Not only the US, the UK saw consumer price inflation leaping to 7.0 per cent in March, its highest since March 1992 and up from 6.2 per cent in February. Office for National Statistics' chief economist, Grant Fitzner, said, "Amongst the largest increases were petrol costs, with prices mostly collected before the recent cut in fuel duty, and furniture."

Japan too saw near record-high wholesale inflation in March. The corporate goods price index (CGPI) rose 9.5 per cent in March from a year earlier. CGPI measures the price companies charge each other for their goods and services. That followed a revised 9.7 per cent spike in February, which was the fastest pace on record, and exceeded a median market forecast for a 9.3 per cent gain. The March index, at 112.0, was the highest level since December 1982, the Bank of Japan (BOJ) said.

Peterson Institute for International Economics said that the global economy is set for a step back, with rising risks of a recession. It expects global growth to slow to 3.3 per cent, compared to 5.8 per cent in 2021. 

Also read: US inflation jumped 8.5% in past year, soars at fastest pace in over 40 yrs

Impact on India

Several experts, as well as the State Bank of India, stated that the Reserve Bank of India is now expected to hike the repo rate by at least 50 bps. This is likely as India’s inflation at 6.95 per cent is above RBI’s comfort band of 4 per cent with a margin of 2 per cent on either side – 4 (+/-) 2 per cent. “We now expect a 25-basis point rate hike each in June and August, with a cumulative rate hike of 75 basis points in the cycle,” stated SBI in its Ecowrap research report. 

All eyes are on India's monsoon rains too and the first reports indicate average rainfall this year. Monsoon rains are expected to be 98% of the long-term average and there is a 65% chance that India will get average rainfall, India's private weather forecasting agency Skymet said on Tuesday.

Nearly half of India's farmland, which has no irrigation cover, depends on annual June-September rains to grow crops such as rice, corn, cane, cotton and soybeans. A good monsoon is then expected to cool soaring temperatures and bring down inflation, something which RBI will also factor in during its rate-setting meetings and the government for its interventions.

Thus, India will face strong headwinds to counter inflation and balance growth in the coming months as the recent break in COVID cases have given some respite and healthy numbers to indicate a robust economic recovery. But biting inflation will take some sheen away and steps will have to be taken sooner than later to counter the effect of rising fuel prices and global supply shocks to contain headline-grabbing commodity prices which impact daily life. 

With Russia-Ukraine war stretching to day 49 and global recession woes looming large, calibrated rate hikes and a good monsoon appears to be the key factors in India's battle against price rise. 

(With agency inputs)

Also read: 24% households cut consumption, 29% downgrade edible oil: LocalCircles