Inflation threat looms over India

Inflation is still India’s biggest challenge, experts warned yesterday as the country’s central bank cut interest rates by a quarter-point.

Changyong Rhee, the Asian Development Bank’s chief economist said that inflation was “a serious issue for India”. Speaking to Emerging Markets, he said it was the largest challenge currently facing politicians and legislators “trying to juggle two balls at the same time” – high prices and slowing growth.

The Reserve Bank of India cut its policy rate by a quarter of a percentage point to 7.25% yesterday, in line with expectations.

Rhee said the best that Delhi could hope for in the current climate was to stabilise inflation “around the 7.5% mark,” a level that “wasn’t really very low at all”.

Few countries historically suffer from inflation quite the way India does. Wholesale prices have eased in the past 12 months, though they still rose by just shy of 7% year-on-year in March.

But it is consumer prices that really hurt a country reckoned by the World Bank to be home to a third of the world’s poor. Consumer price inflation rose in March at an annualized rate of 10.4% in rural India, and by 10.3% in towns and cities. They are among the highest rates in Asia, and several percentage points above the other four “Brics” countries.

Chandra Kochhar, CEO and managing director of India’s private lender ICICI Bank, described inflation as one of three key challenges facing Asia’s third-largest economy, along with deficits and a stumbling economy. India’s current account deficit has widened over the past year to 5%, while the economy was this week tipped by the World Bank to grow by just 6.1% in 2013. 

There is an obvious solution to inflation, albeit one with political implications. Last year, the government finally passed a foreign direct investment (FDI) law permitting foreign corporates and investors to own a majority of multi-brand retail outlets in the country, opening the door to global supermarket names like Carrefour, Tesco and Walmart.

Those mega chains may lack supporters in some Western countries, but in the developing world they are often godsends. The introduction of hypermarkets to Eastern Europe in the 1990s helped boost employment and slash stubbornly high inflation, a phenomenon known as the “Walmart effect”.

In India, this has mixed connotations. Thousands of family-run dime-store operations will go to the wall in the coming years. However an expanding middle-class is likely to fall in love with air-conditioned supermarkets offering choice and low prices.

Rhee said he believed food inflation in India was largely a result of supply and not demand constraints and that supermarkets could soothe India’s inflation headache just as they once did in central and eastern European countries.

But foreign supermarket chains have not really been tested yet in India, and the finer details of last year’s retail FDI law have yet to play out in public. Multi-brand retailers will remain barred from a few states that refused to sign the law.

The main challenge will be convincing India’s leaders to have the courage of their own convictions, said Rhee. Politicians “do think about poor people, and they do care about how many small shops will lose out,” he said.

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