India needs to be wary of imported inflation, Economic Survey warns

There is a threat of imported inflation from the depreciating rupee value against the US dollar and the rising global oil prices that have touched $90 a barrel last week.

The Economic Survey states that 'although the high wholesale price index (WPI) inflation is partly due to base effects and will even out, India does need to be wary of imported inflation, especially from elevated global energy prices.'

In fact, inflation has come back to haunt the global economy after a long period of low-interest rates and surplus liquidity.

While the consumer price index (CPI) or retail inflation has shot up to 5.59 per cent in December month as compared to 4.91 per cent in the month of November 2021, the RBI has projected retail inflation to peak between January to March of 2021-22.

The central bank believes that inflation will soften thereafter.

While the economic survey has rightly highlighted the danger from imported inflation, the RBI seems to have projected an optimistic picture.

"Inflation had already jumped up in most countries, and the cycle of liquidity withdrawal was being initiated by major central banks. This is why it is especially important to look at India’s macro-economic stability indicators and their ability to provide a buffer against the above stresses," states the survey.

The global central bankers are already hiking interest rates to tame the inflationary pressure. US Fed chairman Jerome Powell had said that he expects a series of interest rate hikes this year, along with the withdrawal of bond purchases to reduce surplus liquidity in the market. Bank of England has already hiked the interest rates for the first time in more than three years. In fact, the central bankers of Russia, Mexico, and dozen others have raised rates.

The RBI has projected a CPI of 5.3 per cent for the entire year 2021-22, which is closer to 6 per cent upper target set by the government for the monetary policy committee.

The divergence between the CPI and WPI inflation has also been a subject of debate in the market. Take, for instance, the CPI closed the December month at 5.59 per cent whereas the WPI was more than double at 13.56 per cent in the same month.

The survey states that "the divergence can be explained by factors such as variations due to base effect, the difference in scope and coverage of the two indices, their price collections, items covered and difference in commodity weights."

In addition, the survey states that the WPI is more sensitive to cost-push inflation led by imported inputs.

"With the gradual waning of base effect in WPI, the divergence in CPI inflation and WPI inflation is also expected to narrow down," states the survey.