Short-term inflation rise won't lead to growth in India

IANS/New Delhi
Filed on January 19, 2020 | Last updated on January 19, 2020 at 09.53 pm
If onion prices are excluded from India's headline inflation, the print comes to be 4.48 per cent.

(Reuters file)

Once vegetable prices decline, headline inflation will return within RBI's comfort zone of 4%

The classical economic theory of high inflation leading to gross domestic product growth will not be applicable to India even if retail inflation has touched 7.35 per cent, since the price rise is led by highly volatile food and vegetables and is a short-term spike.

"The current inflation is temporary, led by vegetables, as the difference between core and current inflation is almost 3.7 per cent. The inflation in January could have come down to 6 per cent. Thus, we should not be relating the headline inflation with growth. It's a short-term spike and would not lead to growth. It's a temporary phenomena," N.R. Bhanumurthy, senior professor at the National Institute of Public Finance and Policy, told IANS.

The core inflation excludes the more volatile items - food and fuel - from the computation of the inflation index. While retail inflation accelerated to 7.35 per cent in December on the back of rising food prices, core inflation is still low due to subdued demand.

Thus, once vegetable prices decline, the headline inflation will return within the Reserve Bank of India's comfort zone of 4 per cent.

According to State Bank of India, if onion prices are excluded from the headline inflation, the print comes to be 4.48 per cent.

The country is witnessing a six-year decline in GDP growth and six-year high inflation. The previous high in retail inflation was at 7.39 per cent in July 2014, the year Narendra Modi-led government assumed office.

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