RBI forecast shows that Narendra Modi administration is facing its worst inflation period so far

• The Reserve Bank of India’s (RBI) forecast shows that rising prices in India are not going away soon.
• This could undermine the very promise of keeping inflation at bay, made by the Bharatiya Janata Party (BJP) in 2014 when Narendra Modi was elected into office.
• The annual average inflation this year, including the RBI’s forecast for March, is set to cross 6% — outside the apex bank’s inflation target range.

High inflation, in the country, was one of the biggest propellers for Narendra Modi to get elected to the Prime Minister’s office in 2014, as he used it as one of his election campaign slogans against the incumbent government.

Seven years later he might be faced with the worst bout of price rise in his tenure, and it has come at the most inopportune time — during a pandemic.

As in any developing economy, the people of India are very sensitive to inflation. The crash in global crude oil prices kept inflation checked in the early years of Modi. However, recent supply disruptions since the COVID-19 pandemic have led to some serious price rise, despite an economic slump.

The recent rise in the price of fuel has caused much unease even among the supporters of the current government led by the Bharatiya Janata Party (BJP).

Source:RBI

The average inflation for the financial year ending March 2021 was 6.69% and the pace of price rise may persist at nearly 5% in the coming 12 months as well. “Inflation expectations of urban households one year ahead showed a marginal increase over the three months ahead [quarterly] horizon according to the Reserve Bank’s March 2021 survey,” said Das.

The choice between doling out more money and keeping inflation in check

This is a catch-22 situation for the policymakers. On one hand, there is a need to stimulate the economy with more money and push it towards recovery from the damning blow of the pandemic. This increased money supply usually leads to inflation along with economic growth.


But right now, inflation is already high and a meaningful economic recovery is yet to show. “The renewed jump in COVID-19 infections in certain parts of the country and the associated localised lockdowns could dampen the demand for contact-intensive services, restrain growth impulses and prolong the return to normalcy. In such an environment, continued policy support remains necessary,” said Das.

Consumer confidence is already low

While people wait for pandemic-related restrictions to ease and businesses wait for prospects to improve — or for employment opportunities to pop-up — the price rise has already started pinching their pockets.

The RBI itself expects price of pulses⁠— like tur daal and urad daal— to remain expensive even as the price of cereals like rice and wheat to ease after the next harvest.

Meanwhile, global crude oil prices ⁠— India relies on imports for over 80% of its oil needs ⁠— have repeatedly threaten to spiral out India’s comfort zone, and it, typically, fuels inflation in other products and services as well.

The Ministry of External Affairs, on April 2, made an appeal to the Organization of the Petroleum Exporting Countries (OPEC) to not restrict supply of crude oil. “Crude supply could be market determined rather than artificially managed,” said MEA spokesperson Arindam Bagchi.

Within the country, both the RBI and the central government, are appealing to state governments to reduce duties on fuel like petrol and diesel before the consumers — and voters — become irreversibly irate. Given the slump in the economy and added expenses to manage a pandemic, it has become a tough decision to make.

Prices of other commodities from iron ore and copper to aluminium, have also risen making a lot. This had made other products from steel to cars and other automobiles more expensive at a time when the demand is relatively tepid.

Testing times ahead for Team Modi

Yet, food and fuel prices are the ones that voters react to the most. The future of fuel prices is dependent on a variety of factors beyond the government’s control. For food prices, Governor Das’ hopes are pinned on a right amount of, and well distributed, rain from the southwest monsoon. But, as we all know, climate events aren’t as rare anymore.

The next few months can be testing for policymakers to ensure that the populace, already frustrated by the ill-effects of the pandemic, does not get burdened by high prices before the economy improves.

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