Tamanna Inamdar: A number of economists see inflation as a worrying factor. What is your take?
Dr Devendra Pant: Clearly, the protein based inflation is high. On the cereal side, it’s deflation that’s in place. But in oil and fats, and pulses too, inflation is rising. On top of it, add the price hike in milk products by the likes of Amul and Mother Dairy and you get the picture.
Inflation is going to increase for vegetables as well as pulses. As for oil and fats, it is last five-six months it has been in excess of 20%. In health, it is more of a structural inflation now, because in the last three months it has been more than 7%. All these things are likely to keep inflation high.
For the entire year, monsoon is a risk. So is high commodity prices. There are supply bottlenecks, because how can one otherwise explain the rising core inflation at a time when demand is weak? Until and unless those bottlenecks are taken care of, inflation will remain high.
On IIP, we should look at where we are compared to February 20 — just a month before the lockdown started. Barring electricity, all other things including mining and manufacturing are still lower than in February 20. That number will always remain volatile, and unfortunately this leaves us with only the corporate manufacturing numbers. We do not have anything that’s likely to happen in the unorganised sector, which is likely to have a bigger impact.
Have we been seeing a turning point in manufacturing in the last few months, or is this mostly about base effect?
The IIP number will be volatile. It was volatile even during normalcy in the economy. It has largely disappointed and more disappointment has come from the manufacturing side.
In the past few years, when the IIP growth or the manufacturing growth has been low, it is the electricity sector that has provided support. It is the one sector that has shown better production than the pre-Covid levels.
Now, can we just bank on one particular component of the IIP basket? The answer is no. We are looking at an economy where the demand is muted. With muted demand, we cannot have a buoyant or booming manufacturing sector. It may come good for a month or two, but you will have more of inventories piling up and the production suffering.
In April and May, during the partial lockdowns, manufacturing activities were continuing but there were no sales, because only essentials were being sold. So my worry is that maybe in months to come we may see a weaker IIP print than we have seen in the month of May 2021.
How you think will the Reserve Bank of India respond?
It is unlikely that the RBI is going to do anything in this calendar year, even if inflation remains remains in excess of 6%. As of now, in order to give some fillip to growth, it will continue to remain in an accommodative stance.
However, at a time when the issue is mainly of demand being hurt by slower income growth — people losing jobs, employment related issues, etc — it is unlikely that ultra-low interest rates will have a significant impact.
From that point of view, rates will likely remain on hold in calendar year 2021 and even beyond that. Things could change around budget time based on how the borrowing programme of the government pans out.
Had it been a normal year, the RBI would probably have moved away from ultra-loose monetary policy or from the accommodative stance to a neutral kind of stance. But looking at the situation now, it is more likely the current policy stance will be maintained at least for the calendar year 21.