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Synopsis

High food inflation along with lower core inflation do not indicate demand growth, says Jahangir Aziz.

ETMarkets.com

The fact that core inflation has gone down along with a very surprising decline in industrial production suggests that even the manufacturing sector does not look that good, says Jahangir Aziz, Head, Emerging Market Economics, JP Morgan.

Would the stimulus measures announced by the Finance Minister be able to trigger consumption?


There are two parts to it. One part is very convoluted. If you are a government servant and for the last four years you have not used your leave travel allowance (LTA) then you can use it this time to buy things online for goods with over 12% GST. It is very difficult to understand what the impact of something like that will be.

The other part is increased infrastructure spending in the northeast. I cannot imagine how one can have an additional infrastructure spending in any part of the world with a pandemic going on. With people wearing masks and being separated by six feet, I am not sure how you will lay a railway line efficiently. But more importantly, if the government does provide extra stimulus and then the government borrowing or the fiscal deficit continues to be the same, then there has to be some other place from where spending is being cut because there is not really any change in the amount of fiscal stimulus.

By rearranging expenditure, one might get a little bit of demand going but I am really confused by the logic of the government.

Inflation has reared its head again in India. Is this transitory in nature or is it beginning to bottom out now?

If you break up the headline inflation into food inflation and core inflation, then on a month-on-month basis, core inflation has gone down from an annualised rate of 6% to about 3% in the last one month. What has really pushed inflation up is the massive increase in food inflation. From that, it is very difficult to say that it is an indicator of demand coming back.

It is more of an indicator of supply disruptions taking place in the agricultural sector and because of the supply disruptions, food inflation is continuing to go up. I agree with the RBI that this is transitory but the fact that core inflation has gone down along with a very surprising decline in industrial production suggests that even the manufacturing sector does not look that good.


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1 Comment on this Story

Shaleen Nath1 day ago

If the industry pass on the lower borrowing cost, wages and taxes to the consumers they would be able to gain margins once again the growth bounce back they may adjust prices according the demand, during low demand lower price may help increase the scale and profits and during higher demand they could increase prices again… This time we need to increase demand by lowering the prices… Lower prices would help increase demand and price expectations…

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