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Inflation: We need to be worried now, says CRISIL’s Dharmakirti Joshi

After the WPI and CPI numbers were released, CRISIL’s chief economist said that we need to start taking measures to contain the damage caused largely by external factors

March 15, 2022 / 11:52 AM IST
CRISIL's Dharmakirti Joshi said that they expect a 50 to 75 bps rate hike in 2022-23. (Illustration by Suneesh Kalarickal)

CRISIL's Dharmakirti Joshi said that they expect a 50 to 75 bps rate hike in 2022-23. (Illustration by Suneesh Kalarickal)

With the latest WPI and CPI numbers, at 13.11% and 6.07% respectively, there is cause for concern. Dharmakirti Joshi, Chief Economist at CRISIL, in an interview with Moneycontrol, said that the government may need to do a trade off–whether inflation levels need to be contained with import-duty cuts or fiscal deficit needs to be managed by retaining the taxes. There are other challenges as well–the twin-deficit problem seems to have set in, the inflationary pressures are largely external and growth momentum is likely to weaken if geopolitical strife prolongs.

What do you think is driving WPI levels?

WPI is primarily driven by crude and other commodities. I think there, the prices have really firmed up. They were high even during the COVID time and they have firmed up further now. When the price of crude rises, prices of many of its byproducts get passed on. Not prices of petrol or diesel because they are controlled, but prices of naphtha, fuel oil or air-turbine fuel, they are immediately passed through and they are reflected in the wholesale prices. So, the input costs have continued to remain high and they continue to rise at a faster pace (which is driving WPI levels).

Why is there so much divergence in WPI and CPI numbers?

This isn’t something new. Even in the past there have been times when they were (vastly divergent), for example there was when WPI inflation was in the negative but CPI was close to 7%. The point is that the baskets of commodities in WPI and CPI are different. So if there is food inflation, it will reflect quickly in CPI and not so much in WPI. But if commodity prices are rising, they will quickly reflect in WPI.

Then if there is an adverse event, like a weather event or the Ukraine crisis, do you think CPI levels can change abruptly?

The kind of inflation pressures we are seeing are more from the supply side. The demand in the system reflected in private consumption is generally weak. It’s not the demand that is causing inflationary pressure, but it’s the supply side. If the input costs remain high for longer or else the crude and the WPI remains high, then the producers will have to pass it on to the end consumer. Some pass through is bound to happen. It is already happening in some commodities such as with paint, premium automobiles and FMCG categories.

What about prices of food?

Food is seeing pressure primarily in edible oil. But not so much in wheat, rice, because we have enough food grain stocks to cushion the price pressures. But, globally, I think these commodities are on fire. India’s good luck right now is that we have enough food grains and we are also able to export some of them.

With high levels of stock in wheat and rice, we have managed to do very well. (But) the other two commodities, which have very high MSP, that is pulses and edible oil, I think things are much worse. Even our production is below target this year. In those other segments, we'll see more price pressures compared to food grains.

Did the CPI number, of 6.07%, surprise you?

No, we had predicted 6.1%

How long do you see WPI and CPI staying elevated?

It is hard to predict, because it is hard to predict how long the Ukraine -Russia conflict continues and how long sanctions will last. Therefore, it’s a difficult call at this juncture. But yes, I think for the foreseeable future, the trend will be towards an upside.

What do you think the RBI will do?

They will reassess their inflation outlook, because since their last forecast, things have changed quite a bit… the Ukraine conflict, the oil prices rising. These are new developments. So they will factor them in and they will reassess inflation and recalibrate their policy. We are factoring 50 to 75 basis point rate hike in 2022-23.

How will the Fed rate hike affect the economy, in these circumstances?

The Fed has already prepared the market for a rate hike. The problem happens when they surprise (the market). As of now, they have already communicated and we believe that up to six rate hikes will happen in 2022 itself. So, that is not a surprise, the market already knows it. If they surprise on that front, then that will cause more volatility.

Will we have a twin-deficit problem?

Well, we already have (that). We have a high fiscal deficit and the current account deficit, with this kind of oil prices, is bound to rise. As I said, it will all depend on how long the crude and commodity prices stay elevated.

At what point should we start worrying?

We should even be worried right now, and start taking steps to contain the damage. I meant to say, (start doing) whatever we can, since this is (the result of) an external shock. It's not fully under our control. We can only mitigate its impact on the economy to some extent, the rest… we will have to endure it.

It isn’t as bad as it was in 2013, when the current account deficit was at 4.5% to 5%, but both the deficits are under pressure–fiscal deficit is high and current account deficit is on the rise.

Read also: SBI sees rupee at 77.5% by June, CAD at 3.5% if crude boils

What steps can the RBI or the Finance Ministry take, at this point?

I think the Finance Ministry can do more at this point than the central bank because they can cut duties on imported products. That will have some impact on inflation but will raise the fiscal deficit. So, there is always a tradeoff.

Which would be the lesser evil?

There is a tradeoff. Both are problematic, I think. We have to decide at a certain point in time whether inflation is a bigger problem or the fiscal deficit. Right now, inflation is rising so this (cutting of import duties) can be a response to that.

What will be its impact on growth?

It is a negative for growth. The Omicron wave was mild and we were expecting some upside to growth, but that upgrade has been completely eaten up by the increase in food and commodity prices.

With the pandemic waning, will the demand revival also act on inflation?

We don’t foresee a strong demand revival. The economy is still below its potential, the capacity utilisation is still low. So the kind of inflation you are seeing in the West, in the US where it is close to 8%, where there is strong demand pressure on inflation, we don't have that. Our is more of a supply-side driven inflation. 

If the fuel prices are passed on, how do you see CPI inflation moving?

As I said, it will depend on where the global oil prices are moving. We are working with an assumption of $87 per barrel for 2022-23. Oil will float around $100 for a few months, and then it will come down. CPI inflation at that price (of $87/barrel) is 5.4%. It is higher than what RBI has forecast at 4.5%.

Asha Menon
first published: Mar 15, 2022 11:31 am