Non-tradable inflation remains big worry: NIPFP's Shah

Ajay Shah, senior fellow at NIPFP says though tradable inflation has dropped dramatically, non-tradable inflation still remains a big worry. “Non-tradable is really what domestic macro policy does and non-tradable inflation is what domestic macro policy should be focusing on,” he explains adding, the conditions there are really terrible.

“The latest data for the month on month seasonally adjusted CPI inflation is showing an average of the latest three months of 15 percent, which is really bad. I am not excited about what is happening in inflation. The overall CPI the latest month on month seasonally adjusted data is still giving us 15 percent inflation,” he told CNBC-TV18 in an interview.

Below is the verbatim transcript of his interview to CNBC-TV18

Q: How are you looking at the inflation trajectory? The last wholesale price index (WPI) number we got was sub 6 percent that is after 40 months but very correctly you look at consumer price index (CPI) very closely that is still at double digits but at least showing a declining trend – how are you looking at these numbers 6 months down the line or a year down the line?

A: The good news is that tradable inflation has dropped dramatically. The latest month on month seasonally adjusted tradable inflation is showing 3 to 4 percent, which is just splendid. This is a combination of the global decline in commodity prices and the current conditions of the rupee dollar market.

The trouble is that things are extremely bad on non-tradable. Non-tradable is really what in domestic macro policy does and non-tradable inflation is what domestic macro policy should be focusing on and the conditions there are really terrible. When one puts these together one gets the overall CPI.

The latest data for the month on month seasonally adjusted CPI inflation is showing an average of the latest three months of 15 percent, which is really bad. I am not excited about what is happening in inflation. The overall CPI the latest month on month seasonally adjusted data is still giving us 15 percent inflation.

Q: The conversation with commodity experts indicates that globally as well softs- grains for instance could have a bearish phase in 2013. This will be subject to the weather but that is the initial call that commodity experts give us. As well we have had seminal falls in the India growth story and therefore in consumption – do you see enough things to bring down this non-tradable inflation in the months to come or do you think that more needs to be done to bring it down?

A: The first thing that I would like to say is that, at least I don’t have a good understanding of non-tradable inflation. I wish I did and I wish people understood non-tradable inflation. I wish people understood domestic inflation better but I for one do not.

We know that when a country experiences long and sustained periods of high inflation this makes it very difficult because high inflationary expectations get set in. My fear and my discomfort is that by now India has a long tradition of falling on inflation. People have got use to double digit inflation. People are factoring in double digit inflation into their lives and it is not going to be easy to purge this inflation.

Q: Because of the decline in commodity prices the external account situation is still looking good but on the growth side it is still not looking that comforting – after this 5 percent growth close to that, that we have seen in FY13 how much of an improvement can we expect in FY14? Where would your growth estimates be?

A: The most recent momentum in growth is awful. There is some raise of hope in terms of the recent pick-up on the part of the cabinet committee of investment on starting to de-bottle neck some of their projects and we would like to see greater movement by government. Not narrowly on projects but more broadly on the policy environment in which projects operate this includes procurement procedures, infrastructure contracting, and the mechanisms of signing infrastructure agreement and so on. There is some improvement in terms of what is happening on the government side.

The translation of these improvements in to growth is slow and will be limited for two reasons. The first reason is that there are just sheer lags, that when a decision is taken in New Delhi it takes long time for spending to hit the ground. The second is that, in my opinion we are seeing significant balance sheet difficulties both on the part of the infrastructure developers and on the part of the financial system. I feel we have got ourselves into a bit of a spot and it will take some time before we are able to pull ourselves out.

Q: While I admit the general understanding of non-tradable inflation is very-very weak in India – even data would be perhaps very suspect. What is your sense therefore the Reserve Bank stands pat and the government should be more aggressive in cutting fiscal deficit?

A: I feel that there is tremendous value in achieving low and stable inflation. When inflation is at 15 percent, the latest three months – month on month seasonally adjusted CPI, when inflation is 15 percent it damages the ability of people to do business. It damages the ability of people to make plans for the future.

It destroys nominal contract. Two good friends sign a contract but six months later that contract does not work for them any more. I feel that high inflation is damaging Indian growth and both the RBI and the government should be working hard to achieve low and stable inflation. There is a lot to be gained by achieving that.

Q: What should the RBI do given CPI is trending at 15 percent, the growth-current account dynamics? What is your sense the RBI should do on May 3rd and thereafter in the next one year?

A: The predominant objective for RBI should be price stability.  They should do what it takes to hammer away, to stay focus and just deliver the one job that only a central bank can deliver which is price stability.

Q: Currency will always be market determined, but are you getting a sense that we are going to see the currency appreciate in the months to come as commodity prices start ebbing away?

A: On one hand we have these improvements on the current account. On the other hand one hopes that there will also be certain improvements on the capital account. On the capital account there are two stories going on. The first is that we are hoping that the liberalization on the corporate bonds and the government bonds will continue.

I was a little disappointed when I read the RBI and Sebi documentation on this USD 76 billion. I wish it was a lot more streamlined, a lot more open and I hope that government will see reason and remove these restrictions on the capital account further. The other point is that as India find its feet, for example the work on capital account decontrol, the work on the Cabinet Committee on Investment (CCI) I feel we will become more attractive to global investors.

Q: Do you think that we would be reporting better numbers from the current quarter, the April-May-June quarter at least or do you think improvement is still a distance away, we are just chipping at bottlenecks?

A: I am more gloomy than most. I think that the balance sheet difficulties in the field of infrastructure and infrastructure financing are going to damage us more than anything.

Q: FY14 would be a washout you believe?

A: Yes.