Differences abound in global, India inflation drivers, say experts

Say, overall, inflation unlikely to be a major worry in India, except for food inflation

The increasing focus on inflation does not erase the differences that drive it in India and elsewhere in the world. The economists, who participated in the State Bank of India’s Banking and Economics Conclave in Mumbai on Wednesday, said the factors underpinning the numbers vary.

Poonam Gupta, director general of the National Council of Applied Economic Research (NCAER), pointed out that inflation in the United States of America has been driven not only by global supply chain disruptions but also by labour supply constraints.

Inflation may well abate once these issues are sorted, Gupta suggested. She also pointed out that there has not been a very large stimulus in India nor have we had a labour supply constraint. This also has a bearing on how sustained a problem it might be going forward.  “I don’t think inflation is going to be a lasting issue globally or for India,” she said.

The State Bank of India’s Group Chief Economic Adviser Soumya Kanti Ghosh said that there have perhaps been changes in the way inflation has worked over the years. For example, the linkage between wage and inflation has perhaps broken down. It is unlikely to be a major economic problem in the longer term here, according to him.

“I don’t see inflation as a significant potential threat, apart from one or two numbers, for a country like India. But we need to be cautious on this because food inflation in India (is politically sensitive and) ... has actually won and lost elections,” he said.

Sajjid Chinoy, chief India economist of J P Morgan, said one needs to look at advanced and developing economies separately. The advanced economies have taken a policy decision to “reflate”.

“In developing economies, I think there is far more damage coming out of this pandemic which should be disinflationary. The problem is inflation expectations in developing economies aren’t well anchored. So, (if) you get 6-8 quarters of high inflation...will that get entrenched, is the question,” he said.

Growth is also being closely watched amid the turmoil that the Covid-19 pandemic has caused. Government policies are likely to give an impetus to growth, said Sabyasachi Kar, professor at the Institute of Economic Growth. He said that deeper reforms may be needed to make sure that growth is sustainable. He pointed out, for example, that India considerably lags other countries in contract enforcement even though it has improved in other metrics of ease of doing business. Financial sector reforms are another deeper reform that could help create sustainable growth, according to Kar. “We need to look at institutional reforms,” he said.

The views of rating agencies will depend on how India’s debt rises compared to its economic growth, said JP Morgan’s Chinoy. He said that India’s debt will rise to the equivalent of 90 per cent of GDP this year and it is important that it does not rise constantly for the next five years because then ‘bad things will happen’. It can be tempting to clamp down on fiscal deficits at this point in time, he said, which would essentially entail cutting spending to reduce debt. However, the impact of such restrictions on growth may well result in the very outcome it is looking to avoid. Growth to increase the GDP figure is more important than cutting debt if the goal is reducing the debt-GDP ratio, according to him.

“Nominal GDP growth...in the next five years is the biggest determinant of debt dynamics,” he said.

Pulak Ghosh, professor at the Indian Institute of Management, Bangalore, said that it is important to re-examine the way data is collected and analysed while making policy moves. There is a need to look beyond survey methods on data collection that can inform decision-making. He pointed out that technology enables data collection already on a number of factors like the goods and services tax, which can lead to better estimates of gross domestic product.  Such numbers also need to be put to use, according to him. “Now we are actually sitting on tonnes of data,” he said.