Economic Survey: Retail inflation may soften to 5-5.5% in FY16

Retail inflation is likely to soften to 5-5.5 percent in 2015-16 as benign oil prices, weak global demand and increased agricultural supplies would help keep prices within limits, says the Economic Survey.

"Consumer price inflation (CPI) which is likely to print at 6.5 per cent for 2014-15 is likely to decline further. Our estimate for 2015-16 is for CPI inflation to be in 5.0-5.5 percent range and for the GDP deflator to be in the 2.8-3.0 percent range," the Economic Survey for 2014-15 tabled in Parliament by Finance Minister Arun Jaitley today said.

Structural shifts in inflationary process are underway caused by lower oil prices and deceleration in agriculture prices and wages. "These are simultaneously being reflected in dramatically improved household inflation expectations.

The economy is likely to over-perform on RBI's inflation target by about 0.5-1 percentage point, opening up space for further monetary policy easing," the survey said.

Reserve Bank had projected CPI inflation at 8 per cent by January 2015 and 6 percent for January 2016. The momentum of food prices has declined even more and it is at levels below overall inflation, the survey said, adding going forward this is likely to persist. Crude oil prices are expected to remain benign in coming months, and it will be about 29 per cent lower in 2015-16 compared with 2014-15 (USD 59 versus USD 82).

"Global demand will remain soft because of slow growth in major areas of the world economy, including China and Europe," it added. Besides, oil prices, India's inflation will be shaped by pressures from agriculture, foreign and domestic front. If the falling trend in wage growth, which has declined to about 3.6 percent from over 20 percent, continues it will help further moderate inflationary pressures, it added.

On inflation expectations, the Economic Survey said it will be increasingly be anchored at more reasonable levels, moderating wage setting. As per RBI's survey of inflation expectation, it has been stubbornly persistent and at levels, well above actual inflation. Presenting Outlook and Challenges Ahead on prices, the survey said inflation is not expected to rise significantly from current levels.

Rationalisation of subsidies and better targeting of beneficiaries would generate part of resources for public investment, it added. There is an ample opportunity to increase production by bridging yield-gap to the extent feasible within climatic zone and every effort should be made to bring states on board for creating national common markets for agricultural commodities, it added.