Image for representation purpose only.

Doubling standard deduction to ₹1 lakh, increasing tax break on interest paid on housing loan and rationalisation of capital gains tax regime are some of the expectations that consultancy firm KPMG has from the Budget 2024-25 to be unveiled on July 23 in Parliament.

There has been a significant rise in medical expenses, fuel costs and overall inflation. Keeping in mind the increase in personal expenditure it is popularly expected to enhance the standard deduction to ₹1 lakh from the existing limit of ₹50,000, KPMG said in a note.

With the objective to have more net disposable income which can either be spent on consumer goods or channelised as savings, it is a popular expectation that the basic tax exemption limit under the default new tax regime be increased to ₹5 lakh from ₹3 lakh, it said.

With regard to housing loans, it said there is mounting pressure on the real estate sector with recent hikes in interest rates and regulatory reforms.

To alleviate these challenges and foster home ownership, it is suggested that the government may reconsider allowing deductions for interest on self-occupied housing loans even under the new default tax regime or enhancing the deduction in the old tax regime to at least ₹3 lakh, it said.

Irrespective of the tax regime, it said, the capital gains tax structure in India today is multilayered and has differential rates for different types of assets.

Even the period of holding for a capital asset to qualify as long-term (vis-a-vis short term) varies significantly e.g., for listed equity shares it is 12 months whereas for real estate it is 24 months and for debt instruments, it is 36 months, it said.

“While historically there may have been reasons for creating a complex structure in line with this government’s stated objective of simplifying the tax system it may be worthwhile to provide a more uniform capital gains tax structure [both in terms of period of holding and rate of tax],” it said.

From the customs standpoint, it expects continued focus of the government on alignment of tariff rate changes with the industrial policy objective of encouraging deeper value addition in India.

Coordination of change in Customs tariff rates and roll out of technical barrier to trade is also expected to continue, it said.

Headline inflation has slowed in India mainly because of lower food prices, but the volatility of these prices remains an issue, Moody’s Ratings said.
| Photo Credit: PTI

Volatile and high food prices remain a concern, but base effects may help temper India’s retail inflation pace in June and possibly even cool it below 4% over July and August, rating agencies and economists reckon.

Retail price rise had touched a 12-month low of 4.75% in May, even though food inflation stayed stuck at 8.7% for a second straight month. The National Statistical Office will likely release the Consumer Price Index data for June on Friday.

Headline inflation has slowed in India mainly because of lower food prices, but the volatility of these prices remains an issue, Moody’s Ratings said in a report this week. The agency also flagged stronger wage gains of more than 5% year-on-year.

The prolonged heatwave and the delayed start to the southwest monsoon was likely to have pushed June’s inflation to 5%, said Radhika Rao, executive director and senior economist at DBS Bank. Vegetable prices began to rise sharply as the month progressed, while telecom tariffs were also raised, she pointed out. 

With the monsoon regaining ground this month, vegetable prices were expected to moderate, and base effects would also push July-August inflation to sub-4%, she estimated. Ms. Rao, however, expects no interest rate cuts this year in light of the RBI’s signal that they would look through base effect-driven swings in readings and focus on sticky food pressures. 

In June 2023, retail inflation stood at 4.9%, before it surged to 7.4% and 6.8% in July and August, respectively.

India Ratings and Research expects retail inflation to have moderated to a 13-month low of 4.5% in June, due to a combination of the favourable base effect and a moderation in inflation of key items. But wholesale prices are projected to quicken at a 3.5% pace, from May’s 15-month high of 2.6% due to an unfavourable base.

“Prices of food items such as onion and potato continues to be high, despite softening of inflation in items such as tomato, pulses, milk and sugar,” the agency noted. Tomato inflation was at a six-month low of 29% as per Department of Consumer Affairs data for last month, it added.

Several business owners in Mynamnar have been arrested for giving their employees a raise amidst the country’s soaring inflation. One of at least 10 arrested business owners is Pyae Phyo Zaw, whose three mobile phone shops were shut down by military government’s soldiers he increased his workers’ pay. He was also charged with inciting public unrest, according to a report by the New York Times. 

A sign posted outside one of his shops declared that it was shut down due to “disrupting the peace and order of the community.”

A legal expert explained that there is no prohibition on wage increases in the country. However, wage increases are seen as undermining the regime by making people believe that inflation is rising. They all potentially face three years of imprisonment.

One of Mr Zaw’s employees anonymously said, ”We were very grateful for the salary increase, but now the shop is closed and I don’t get paid. Ordinary people like us are suffering from high prices, almost to the point of despair.”

Critics have said it is a desperate attempt to control the narrative around the country’s economic collapse as it experiences soaring inflation, the Bangkok Post reported. 

”Arresting shop owners because of the increase in prices is not following any law. In Myanmar, the law exists only in name, so from a legal standpoint, everything the junta is doing is absurd,” said human rights lawyer U Kyee Myint. 

Notably, the military’s takeover in a coup in 2021 and the subsequent popular uprising against its authority have plunged the country into an economic crisis, reversing the progress made during a decade of quasi-democratic governance.

According to a World Bank report, Myanmar’s economic output has shrunk by 9 per cent since 2019, and poverty has soared to levels not seen for nearly a decade. A third of the population now lives below the poverty line.

“Myanmar’s economy post-2021 has moved on from the crisis, journeyed through chaos, and now arrives at what is surely its near collapse as a formally functioning, developing entity,” Australian economist Sean Turnell told the NY Times. 

In its latest monetary policy review earlier this month, the Reserve Bank of India (RBI) has projected a 7.2% GDP growth for 2024-25 as opposed to its earlier estimate of 7%, with retail inflation trending down to 4.5% from 5.4% averaged last year. 
| Photo Credit: Getty Images/iStockphoto

The story so far: The National Statistical Office (NSO) has estimated that India’s Gross Domestic Product (GDP) grew 8.2% in 2023-24, outperforming all economic forecasters’ projections. The NSO number even surpassed its own advance estimates that had indicated a 7.6% uptick in GDP last year, imputing a 5.9% rise in the January to March 2024 quarter from 8.4% in the third quarter. However, the fourth quarter is now reckoned to have clocked 7.8% growth, a tad slower than an upgraded 8.6% rise in the previous three months. Private consumption, a key metric that the revival of industrial investments hinges on, remained weak but was slightly better than in the first half of the year.

What are the growth prospects for this year?

In its latest monetary policy review earlier this month, the Reserve Bank of India (RBI) has projected a 7.2% GDP growth for 2024-25 as opposed to its earlier estimate of 7%, with retail inflation trending down to 4.5% from 5.4% averaged last year. Initial indicators for the first two months of this year suggest a sedate start. Industrial output growth slowed to a three-month low of 5% in April, as per data released on June 12. Goods and Services Tax (GST) collections, a proxy for consumption, surged to a fresh high of over ₹2 lakh crore in April, thanks to year-end compliances.

Also read | Coalition crutches could cramp reform chase, say Moody’s, Fitch

While collections in May, based on transactions concluded in April, were healthy too, the growth rate slipped to just under 10%, the lowest since July 2021. But some of this slack could be spurred by the heat waves that have hit several parts of the country this summer, economists reckon. A projected above-normal monsoon is expected to help farm output rebound and perk up the rural economy. “We expect GDP growth for 2024-25 to be around 7.3%-7.4%, with the base effect pulling down the growth,” said Bank of Baroda chief economist Madan Sabnavis. Rating agency CRISIL’s estimate is a little lower than the RBI forecast at 6.8%, said its chief economist Dharmakirti Joshi.

Would a coalition govt. affect the economy’s management and reform momentum?

Following the Lok Sabha election verdict, Prime Minister Narendra Modi has returned to office for a third term as the head of a coalition government this time. There is a broad expectation of continuity in government policy, with the Prime Minister retaining top ministers with their portfolios unchanged, including Nirmala Sitharaman and Piyush Goyal at the helm of key economic ministries of finance, and commerce and industry, respectively. “We expect India’s strong medium-term growth outlook to remain intact, underpinned by the government capex drive and improved corporate and bank balance sheets. But upsides to medium-term growth prospects are likely to be more modest if reforms prove more challenging to advance,” said Fitch Ratings director Jeremy Zook.

While “broad policy continuity” is expected in areas such as the thrust on public capex to spur the economy and gradual fiscal consolidation, a BJP-led government that needs “to rely more heavily on its coalition partners” could find it tougher to push contentious reforms, particularly around land and labour, recently flagged as the party’s priorities, he noted. Moody’s Ratings was not as sanguine about fiscal management prospects as Fitch. The NDA’s “relatively slim margin of victory as well as the BJP’s loss of its outright majority in Parliament” may delay more far-reaching economic and fiscal reforms that could impede progress on fiscal consolidation, it said in a note. Moreover, it has cautioned that the near-term economic momentum masks structural weaknesses that pose risks to long-term potential growth, such as “high levels of youth unemployment”, “weakness in productivity growth” in India’s large farm sector that still accounts for 40% of all employment, and the decline in inward foreign direct investment (FDI) flows in each of the past three years.

What should one look for in the full-year Union Budget to be presented next month?

Taking charge of the Finance and Corporate Affairs Ministry this Wednesday, Ms. Sitharaman has said the reforms drive initiated after 2014 with an eye on bolstering India’s macroeconomic stability and growth, shall continue. The ministry will kick off Budget consultations with industry and other stakeholders in the coming week. While Ms. Sitharaman signalled that ‘ease of living’ for citizens will be a key pursuit for the government, industry expects the Budget to address ongoing policy challenges such as reining in inflation, spurring consumption and investments, and untangling knotty taxation issues such as the recently introduced 45-day payment deadline mandate for micro, small and medium enterprises that has inadvertently ended up hurting them.

Also read | NSSO survey finds COVID-19’s second wave hit informal economy hard

With the GST Council expected to meet next week, the Budget may also indicate the Centre’s plans to pursue rationalisation and reforms of the indirect tax regime that completes seven years on July 1. Some elements of the 100-day agenda items drawn up by ministries should also find space in the Budget, along with more concrete details of initiatives announced in the interim Budget presented before the polls. Ms. Sitharaman, who has recently voiced the need for Indian manufacturing to become more sophisticated and be part of global value chains, may also unveil some steps to catalyse this transition, including a reduction in some of India’s high import tariffs. While BJP allies like the Telugu Desam Party (TDP) and the Janata Dal (United) will, of course, expect some measures, or a package, to meet their aspirations for Andhra Pradesh and Bihar, respectively, at a broader level, this administration’s first Budget is expected to outline its agenda for this tenure and offer glimpses of the blueprint to make India a developed nation by 2047 that the Niti Aayog has been drawing up. The last few decades of India’s economic reforms story show that coalitions have also been effective in driving critical and contentious changes, such as the privatisation drive kicked off by the Atal Bihari Vajpayee government. This Budget could reveal if this coalition-dependent government has a fresh and possibly more consensual approach in mind to deliver on India’s reform agenda.

Equity benchmark indices Sensex and Nifty hit their fresh record levels on Thursday after lower inflation numbers raised hopes of an interest rate cut by the RBI.

Besides, heavy buying in capital goods, consumer durable and industrial stocks also helped the indices, traders said.

Retail inflation continued its downward slide to reach a one-year low of 4.75% in May due to a marginal decline of prices in the food basket and remained within the Reserve Bank’s comfort zone of below 6%, according to government data released on Wednesday.

Rising for the second day in a row, the 30-share BSE Sensex jumped 538.89 points or 0.70 to hit its lifetime peak of 77,145.46. It later ended at a fresh record high at 76,810.90; up 204.33 points or 0.27%.

The NSE Nifty rallied 75.95 points or 0.33% to settle at a new closing high of 23,398.90. During the day, it climbed 158.1 points or 0.67% to its record peak of 23,481.05.

Among the 30 Sensex companies, Mahindra & Mahindra, Titan, Larsen & Toubro, IndusInd Bank, Tech Mahindra, UltraTech Cement, Wipro, Tata Consultancy Services, Bajaj Finance and Nestle were the biggest gainers.

On the other hand, Hindustan Unilever, Power Grid, Axis Bank, Bharti Airtel, ICICI Bank and ITC were among the laggards.

In Asian markets, Seoul and Hong Kong settled higher, while Tokyo and Shanghai ended lower.

European markets were trading lower. U.S. markets ended mostly with gains.

“There is good news on the inflation front, both in the U.S. and in India. The takeaway from the inflation numbers is that the disinflation process is well on track. From the market perspective, this is positive news, particularly for banking stocks,” said V.K. Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Federal Reserve officials said on Wednesday that inflation has fallen further toward their target level in recent months but signalled that they expect to cut their benchmark interest rate just once this year.

The policymakers’ forecast for one rate cut was down from a previous forecast of three, likely because inflation, despite having cooled in the past two months, remains persistently elevated.

Global oil benchmark Brent crude declined 0.71% to $82.01 a barrel.

Foreign Institutional Investors (FIIs) bought equities worth ₹426.63 crore on Wednesday, according to exchange data.

The BSE benchmark climbed 149.98 points or 0.20% to settle at 76,606.57 on Wednesday. The Nifty ended at 23,322.95, up 58.10 points or 0.25%.

Representational image of the seal of the Board of Governors of the United States Federal Reserve System
| Photo Credit: AP

United States Federal Reserve officials will likely make official what’s been clear for many weeks: With inflation sticking at a level above their 2% target, they are downgrading their outlook for interest rate cuts.

In a set of quarterly economic forecasts they will issue after their latest meeting ends, the policymakers are expected to project that they will cut their benchmark rate just once or twice by year’s end, rather than the three times they had envisioned in March.

The Fed’s rate policies typically have a significant impact on the costs of mortgages, auto loans, credit card rates and other forms of consumer and business borrowing. The downgrade in their outlook for rate cuts would mean that such borrowing costs would likely stay higher for longer, a disappointment for potential homebuyers and others.

ALSO READ | Recalcitrant jumbo: Editorial on inflation

Still, the Fed’s quarterly projections of future interest rate cuts are by no means fixed in time. The policymakers frequently revise their plans for rate cuts — or hikes — depending on how economic growth and inflation measures evolve over time.

But if borrowing costs remain high in the coming months, they could also have consequences for the presidential race. Though the unemployment rate is a low 4%, hiring is robust and consumers continue to spend, voters have taken a generally sour view of the economy under President Joe Biden. In large part, that’s because prices remain much higher than they were before the pandemic struck. High borrowing rates impose a further financial burden.

The Fed’s updated economic forecasts, which it will issue Wednesday afternoon, will likely be influenced by the government’s May inflation data being released in the morning. The inflation report is expected to show that consumer prices excluding volatile food and energy costs — so-called core inflation — rose 0.3% from April to May. That would be the same as in the previous month and higher than Fed officials would prefer to see.

ALSO READ | Rationale behind raising interest rates

Overall inflation, held down by falling gas prices, is thought to have edged up just 0.1%. Measured from a year earlier, consumer prices are projected to have risen 3.4% in May, the same as in April.

Inflation had fallen steadily in the second half of last year, raising hopes that the Fed could achieve a “soft landing,” whereby it would manage to conquer inflation through rate hikes without causing a recession. Such an outcome is difficult and rare.

But inflation came in unexpectedly high in the first three months of this year, delaying hoped-for Fed rate cuts and potentially imperiling a soft landing.

In early May, Chair Jerome Powell said the central bank needed more confidence that inflation was returning to its target before it would reduce its benchmark rate. Powell noted that it would likely take more time to gain that confidence than Fed officials had previously thought.

Last month, Christopher Waller, an influential member of the Fed’s Board of Governors, said he needed to see “several more months of good inflation data” before he would consider supporting rate cuts. Though Mr. Waller didn’t spell out what would constitute good data, economists think it would have to be core inflation of 0.2% or less each month.

Mr. Powell and other Fed policymakers have also said that as long as the economy stays healthy, they see no need to cut rates soon.

“Fed officials have clearly signaled that they are in a wait-and-see mode with respect to the timing and magnitude of rate cuts,” Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said in a note to clients.

The Fed’s approach to its rate policies relies heavily on the latest turn in economic data. In the past, the central bank would have put more weight on where it envisioned inflation and economic growth in the coming months.

Yet now, “they don’t have any confidence in their ability to forecast inflation,” said Nathan Sheets, chief global economist at Citi and a former top economist at the Fed.

“No one,” Mr. Sheets said, “has been successful at forecasting inflation” for the past three to four years.

Food inflation surged to a four-month high of 8.7% in April from 8.52% in March. Representational file image.
| Photo Credit: Reuters

Consumers faced a further acceleration in steep food prices in April, even as India’s overall retail inflation remained virtually unchanged at 4.83% last month, compared with 4.85% in March.

Food inflation surged to a four-month high of 8.7% in April from 8.52% in March, with rural consumers witnessing a sharper uptick of 8.75% in food prices. The gap between urban and rural consumers’ inflation experience remained sharp for the second successive month with rural households seeing a 5.43% rise in prices, while the overall inflation rate faced by urban consumers remained virtually unchanged from 4.14% in March to 4.11% in April.

On a month-on-month basis, price levels rose about 0.5%, with urban consumers facing a sharper uptick in overall prices as well as food items. Food prices rose 1.03% from March levels in urban India, while the rise was more subdued for their rural counterparts at 0.59%. The Consumer Price Index (CPI) was up 0.6% over March for urban households, while it was 0.37% higher for rural India.

The Reserve Bank of India (RBI) expects retail inflation to ease to an average of 4.5% this year from the 5.4% clocked in 2023-24, with the ongoing April to June quarter expected to see an average inflation of 4.9%. With April reporting a marginally lower inflation rate than the RBI’s projected average for the quarter, there could see some hardening in prices over this month and June.

The government has tasked the Reserve Bank to ensure inflation remains at 4%, with a margin of 2% on either side.

FAO reports says prices of food remained elevated for second month. File
| Photo Credit: SUSHIL KUMAR VERMA

The United Nations food agency’s world price index rose for a second consecutive month in April as higher meat prices and slight gains for vegetable oils and cereals outweighed decreases for sugar and dairy products.

The Food and Agriculture Organization’s (FAO) price index, which tracks the most globally traded food commodities, averaged 119.1 points in April, up from a revised 118.8 points for the previous month, the agency said on May 3.

ALSO READ | Wholesale price inflation rises to three-month high of 0.53% in March

The FAO’s April reading was nonetheless 7.4% below the level a year earlier.

The indicator hit a three-year low in February as food prices continued to move back from a record peak in March 2022 at the start of Russia’s full-scale invasion of fellow crop exporter Ukraine.

In April, meat showed the strongest gain in prices, rising 1.6% from the prior month. Higher prices for poultry, beef and sheep meat offset a small fall for pork, which was affected by slow demand in Western Europe and from leading importers, especially China, the FAO said.

The FAO’s cereal index inched up to end a three-month decline, supported by stronger export prices for maize (corn). Vegetable oil prices also ticked higher, extending previous gains to reach a 13-month high due to strength in sunflower and rapeseed oil.

The sugar index dropped sharply, shedding 4.4% from March to stand 14.7% below its year-earlier level amid improving global supply prospects.

Dairy prices edged down, ending a run of six consecutive monthly gains.

2024 brings breather on inflation but food prices are still sticky

In separate cereal supply and demand data, the FAO nudged up its estimate of world cereal production in 2023/24 to 2.846 billion metric tons from 2.841 billion projected last month, up 1.2% from the previous year, notably due to updated figures for Myanmar and Pakistan.

For upcoming crops, the agency lowered its forecast for 2024 global wheat output to 791 million tons from 796 million last month, reflecting a larger drop in wheat planting in the European Union than previously expected.

The revised 2024 wheat output outlook was nonetheless about 0.5% above the previous year’s level.

The fall in household savings has been at the heart of recent debates in India. The decline in household savings is brought about by a drastic reduction in net financial savings as the household net financial savings to GDP ratio attained a four-decade low. Figure 1 shows the broad trend in household savings, physical savings and gold, and net financial savings.

The sharp reduction in household net financial savings in 2022-23 has been associated with an overall fall in household savings despite marginal recovery in physical savings.

Interpreting lower financial savings

The net financial savings of the household is the difference between its gross financial savings and borrowing. The gross financial savings of a household is the extent to which its financial assets change during a period. The financial assets of households typically comprise bank deposits, currency and financial investments in mutual funds, pension funds, etc. Though household borrowing includes credit from non-bank financial corporations and housing corporations, the bulk of the borrowing comprises credit from commercial banks. In general, there are at least three distinct factors that can potentially bring about a reduction in household net financial savings.

First, households typically finance their additional consumption expenditure by increasing their borrowing or depleting their gross financial savings. By financing higher consumption expenditure at any given level of disposable income, lower net financial savings provide stimulus for aggregate demand and output in this case.

Also read: No small change: on the raising of returns on small savings schemes

Secondly, when households finance higher tangible (physical) investment by increasing their borrowing or depleting their gross financial savings. The reduction in net financial savings in this case stimulates aggregate demand and output through the investment channel.

Third, when interest payment of a household increases say due to higher interest rates, households can meet the increased burden through borrowing or through depleting gross financial savings thereby inducing a reduction in net financial savings.

The first factor hardly played any role in the sharp reduction in gross financial savings in 2022-23 as the consumption to GDP ratio remained largely unchanged between 2021-22 (60.95%) and 2022-23 (60.93%). The second factor played only a limited role. While the gross financial savings to GDP ratio declined by 3 percentage points (7.3% to 5.3%) in 2022-23, household physical investment to GDP ratio increased only by 0.3 percentage point (12.6% to 12.9%) during the same period. Though higher borrowing is partly financed by interest income from financial assets, it can be largely attributed to higher interest payments of the household in the recent period.

Figure 2 reflects this phenomenon by depicting the trend in household borrowing to income ratio, debt to income ratio and the ratio between household physical savings and gross financial savings.

The share of household borrowing in household (disposable) income registered a sharp spike in 2022-23. Such a rise in household liabilities was associated with a decline in the physical savings to financial savings ratio, indicating a change in household asset composition in favour of financial assets.

Implication of higher debt burden

The rise in household debt burden has two concerns for the macroeconomy.

The first concern is about debt repayment and financial fragility. Since the repayment capacity depends on the income flow, a key criterion for evaluating a household’s debt sustainability is the difference between interest rate and the income growth rate. On the flip side, the interest payments from the households are the interest income of the financial sector. If households fail to meet their debt repayment commitments, then it reduces the income of the financial sector and deteriorates their balance sheets, which in turn can have a cascading effect on the macroeconomy if the latter responds by reducing their credit disbursement to the non-financial sector.

Figure 3 shows the difference between the weighted average lending rate of scheduled commercial banks and the growth rate of gross national income.

Though the difference shows a declining trend since 2021-22, the indicator turned out to be negative in the 2023-24 period. The sharp reduction in interest rate and income growth gap is on account of lower income growth rate and higher lending rate of the commercial banks. The weighted average lending rate registered a sharp rise in the last two years, particularly due to the tight monetary policy stance of the RBI and the sharp rise in the call money rate during this period.

The second concern pertains to the implication on consumption demand. Over and above disposable income, the consumption expenditure of the household can be affected by their wealth, debt, and interest rate. Reduction in household wealth can lead to lower consumption expenditure as households may attempt to preserve their wealth position by increasing their savings.

Higher household debt can also reduce consumption expenditure in at least two ways. First, if higher household leverage is perceived as an indicator of higher default risk, then it may induce banks to indulge in credit rationing and reduce the credit disbursement. The consequent reduction in credit disbursement can adversely affect consumption. Second, higher debt can reduce consumption expenditure by increasing the interest burden, not to mention the effect of higher interest rates on consumption expenditure.

The Indian economy registered all these trends in the recent period. The financial wealth or the net worth of the household is the difference between the stock of financial assets and liabilities. As evident from figure 4, the financial wealth to GDP ratio of the household has registered a sharp decline in the recent period, along with a rise in leverage of the household as indicated by the rise in debt to net worth ratio.

Not surprisingly, the growth rate in private final consumption expenditure during 2023-24 registered a sharp decline as compared to 2022-23.

Macroeconomic implication

The implications of the procyclical leverage by the households along with the compositional change in the asset side of the balance sheet, albeit with a fall in the level of savings, for the stability of economic growth is concerning.

First, given that both the flow indicator of liabilities to disposable income and the stock indicator of debt to net worth shows an increasing trend makes the households vulnerable.

Second, the policy mantra of higher interest rate to counter inflation by reducing macroeconomic output and employment can leave households with an increasing level of debt in their balance sheets and potentially push the households into a debt trap. Third, the implications of high interest rate on debt burden can have an adverse impact on the consumption of the households and consequently for aggregate demand.

The household balance sheet trends indicate a broader change in the structure of the economy. The change in composition of the asset side of the household balance sheet towards financial assets indicate some degree of financialisation of the economy which moves from a production-based economy to a monetary or financial exchange-based economy making the five-trillion-dollar economy both jobless and fragile.

Zico Dasgupta and Srinivas Raghavendra teach economics at Azim Premji University.

Photo used for representation purpose only. A surge in cereal prices at a 12-month high enabled wholesale price inflation rise to a three-month high in March
| Photo Credit: Sushil Kumar Verma

India’s wholesale price inflation rose to a three-month high of 0.53% in March from 0.2% in February, with the food index rising 4.65%, primarily led by cereals prices surging at a 12-month high pace even as the inflation in paddy (11.7%), potato (53%) and onions (57%) accelerated.

Inflation in pulses and vegetables remained elevated at the wholesale level, at 17.2% and 19.5%, respectively, as per the Wholesale Price Index (WPI). Fuel and power as well as manufactured products continued to be in deflation mode, though the level of price declines from a year ago moderated to about 0.8% in March.

On a month-on-month basis, the WPI rose 0.4% — the first such uptick in four months, with the food index up 1.01% and primary articles rising 0.9%. Manufactured products and fuel and power categories were up 0.21% and 0.06%, respectively. The Commerce and Industry Ministry also revised the WPI for January 2024, raising the inflation rate for that month to 0.33% from 0.27% estimated earlier.

Within food articles, there was some relief at the wholesale level from eggs, meat and fish, whose prices slid 1.86%. This is in contrast to retail prices which rose more than 10% for eggs, and over 6% for meat and fish, last month. Milk inflation eased to 4.7% in March, from 5.5% in February, but wheat price rise almost trebled from 2.34% in February to 7.43% last month.

“Positive rate of inflation in March, 2024 is primarily due to increase in prices of food articles, electricity, crude petroleum & natural gas, machinery & equipment and other manufacturing, etc.” the ministry said in a statement.

For the full year 2023-24, wholesale prices remained in deflationary mode, averaging -0.7%, the lowest pace of price rise since 2015-16, said Sunil Kumar Sinha, senior director and principal economist and Paras Jasrai, senior analyst at India Ratings and Research. “While wholesale inflation in the fourth quarter averaged a one-year high of 0.4%, it was still good enough to provide succor to the corporates by keeping the input prices at moderate levels,” they noted. 

However, with the flare up between Iran and Israel, and the rise in crude oil prices beyond $90 a barrel, the firm expects the first quarter of 2024-25 to see an average rise of 2.4% in wholesale prices.

“International commodity prices are showing signs of increased pressure. Going ahead, continued escalation in international crude oil prices, heat wave conditions impacting electricity demand and vegetable inflation, remain key causes of concern,” said Bank of Baroda economist Sonal Badhan.