Executive summary
India recorded a -3.21% WPI in May raising the specter of deflation and demanding the attention of the policy makers
The macroeconomic outlook appears nebulous in light of COVID-19 and its first- and second-order effects
Manifold factors subject the inflation-deflation forecast to divergent pulls and pressures
Connecting the micro and macro dots across the economic landscape projects a moderate return to inflation
After a data hiatus in April, India has reported a deflation of 3.21% in May in Wholesale Price Index (WPI). This contraction is augmented by a host of factors such as low crude prices, consumption collapse, demand contraction, good agricultural harvest, etc., and is bolstered by the complex and multifarious impacts of COVID-19. A persistent deflation is hardly conducive for a developing country like India and will have a deleterious impact on demand and supply, job creation, consumption, investment, and poverty. On the other hand, the Consumer Price Index (CPI) does not always track WPI in India and they diverge often. Consequently, this deflation may not be top-of-mind of most economic mandarins despite its nocuous potential.
What will be a likely inflation trajectory in the near and medium term? Before unpacking this question, let us pause for a moment to look at the humble biscuits. Parle-G biscuits was in the news twice recently, providing us with a microscopic view of the practical and tangible economic realities. Parle, a biscuit manufacturer reeling under a demand contraction even before the genesis of Coronavirus, announced last year that it may axe up to 10,000 jobs as even biscuits that cost as low as Rs. 5/- were facing a sharp sales slowdown. Then, Mayank Shah, category head at Parle, said in an interview with Mint, a financial daily newspaper, “Consumers here are extremely price-sensitive. They’re extremely conscious of how many biscuits they are getting for a particular price.” Varun Berry, managing director, Britannia Ltd, lamented last year that “… even for a Rs 5 product if the consumer is thinking twice before buying it, then there is some serious issue in the economy.” However, amid the Coronavirus pandemic this year, Parle got a sales boost primarily from its value brands that are in demand because of remote work arrangements, traveling migrants, out-of-job unskilled and semiskilled workers as also demand from governments and non-governmental organizations for their pandemic relief work. According to The Economic Times, Parle-G had sold the maximum number of biscuits during the lockdown and may have had its best sales in 8 decades.
Apparently, manifold factors are at play in the increasingly uncertain, anemic, economic landscape, more so in the COVID-19-ravaged 2020. A cursory perusal of the headlines portrays a landscape that is shifting and morphing at a mind-bending rate of change. The controlling factors of this landscape span national and international agencies, economic and financial instrumentalities, business and government compulsions, and last, but not the least, the evolving mindsets and psychology of the populace as determinants of the new normal.
At the outset, let us start with an outlook of the international scene. The world’s second largest economy, China, has massive trade relationships with almost all parts of the world, especially with the key markets of Europe and US. Chinese manufacturing seems to have come under tremendous pressure due to the pandemic in its largest export markets. In May, China’s Producer Price Index (PPI) deflated by 3.7% yoy, as reported by the Chinese National Bureau of Statistics (NBS). This compares with a 57.6% fall in oil and natural gas prices and a 24.4% fall in oil, coal, and other fuels processing sector in that country. A Nomura analyst research report stated, “We believe falling CPI inflation and continued PPI deflation will provide Beijing with more space to implement policy stimulus to offset the impact of COVID-19 on the economy.”
Meanwhile in Japan, a poll of analysts by Reuters surfaced fears that the likelihood of Japan sliding into deflation has increased, due to the restrictions on the economic activities in that country necessitated by the pandemic. Japan’s economy is likely to contract by more than 20% this quarter, which will be the third in as many quarters. Hiroshi Ugai, chief economist at JPMorgan Securities Japan, is quoted in the media as saying, “Even after the pandemic is contained, Japan’s output gap will [sic] unlikely [to] return to positive territory this year and next … That means Japan may suffer a mild deflation.”
Further, Thailand reported a Consumer Price Index (CPI) deflation of 3.44% yoy in May, the largest in 11 years. This is a second straight month of decline. Though Thailand has registered a deflation in the last 3 months and which is expected to persist, a return to growth is expected in 2021 only. The price decline is largely driven by energy and discounted goods and services, which are pushed by the Thai government to ameliorate the economic suffering of its people. ASP analyst, Chanchai Pantathanakij, was quoted in Bangkok Post as, “There is a risk of [consumer prices] entering deflation if the inflation rate is reported in negative territory for three consecutive months … Consumer prices in various categories saw a decline during the past two months, including oil, fresh food and transport.” However, Visit Ongpipattanakul, managing director of Trinity Securities, opined in Bangkok Post that the deflation concerns in his country are overblown, but added a cautionary note that continuous negative consumer prices for a year will effectively put the economy into a state of deflation.
Elsewhere, Bank of England warned that this pandemic will cause the deepest recession not seen in 300 years in the UK — it expects output to fall by 30% in the first half of this year. Clem Chambers, CEO of ADVFN.com, wrote in a column for Forbes on his future outlook, “The majority opinion is deflation because unemployment will be high and demand will be weak, while the supply chain is resilient and will storm back offering plenty of goods to tempt weak demand.” The Swiss National Bank (SNB) forecasted a 6% GDP contraction this year, and a -0.7% inflation outlook in 2020, -0.2% in 2021, and 0.2% in 2022, amounting to 18 months of straight negative inflation. A report in Daily Maverick on the post-pandemic inflation outlook made an “argument for deflationary conditions persisting for at least the short to medium term, as global supplies exceed slow-to-recover consumer demand.” In commodities, energy and metals are hit the hardest by the pandemic. Crude oil prices crashed, which at one point even traded in the negative. Metals such as zinc and copper also dropped in sympathy with other commodities.
On the domestic front, this deflation must be seen in the right context and with a thorough analysis of the contributory factors and mitigants, especially by the policy makers helming the economic and financial future of India. A prolonged deflation will stoke recessionary tendencies barreling upon investment, demand, consumption, and livelihood. As the economy normalizes, a reversion in prices will be evident, which would be captive to a demand crunch resulting from the tight squeeze on incomes. Consequently, a critical study of the present economic indicators pivots us into the possibilities of the future inflation-deflation scenario.
60% of India’s savings comes from households. India’s gross savings rate fell to a 15-year low of 30.1% of GDP for fiscal 2019 from 34.6% in 2012; on the other hand, the household savings fell from 23% in 2012 to 18% in 2019 as a percent of GDP. For a sustained growth momentum, a high savings rate is essential; in the absence of sufficient savings, governments and corporates have to mobilize resources from abroad, increasing India’s external debt. Even before COVID-19, the nation experienced a consumption slowdown, and this is being exacerbated now as people are forced to dip into their savings more than ever to offset income loss and pay for the daily essentials.
Ndtv.com cited a survey that projected lowest salary increases in a decade. Besides, large swathes of the economy will see a reduced take-home pay or even nil salary increase. In some sectors, widespread layoffs have extinguished income and driven up unemployment. In a survey by the Indian Society of Labour Economics (ISLE), job loss was cited as the most severe immediate impact of COVID-19. A report by Global Consultants revealed that around 130 million jobs will be lost to COVID-19, 40% of them blue-collar jobs. A silver lining: a survey by Centre for Monitoring Indian Economy (CMIE) showed unemployment rate falling sharply to 11.63% in the week ended June 14 from 17.51% in the previous week. Mint cited a survey finding that 84% of households in India lost incomes in the lockdown, forcing them to dip into their fast-depleting savings. It is estimated that 139 million people in urban India could have run out of their savings by June end. The urban poor is particularly hit hard than the rural poor because they pay a significantly higher share of their income for the essentials. These tendencies are partly vindicated by the recent and current exodus of whole families from cities back to their native towns and villages. This reverse migration exerts a deflationary pressure on rental rates and incomes in the cities.
A rampaging COVID-19 provides reinforced ballast to the contractionary tendencies. To stimulate consumption, governments always have the blunt instrument of direct transfers. Today, India is firmly fixed in the banking and digital firmament, helped by the Jan Dhan accounts and Aadhaar unique identification number enabling direct transfer of subsidies. A direct transfer of basic income or a stimulus package can stoke inflation. Further, in May, RBI cut policy rates by 40 basis points; the deflation in the WPI provides further scope for RBI to cut rates even further in the near term to first arrest deflation rate and then to bend the curve towards growth. Aditi Nayar, ICRA’s Principal Economist, expects rising crude oil prices may arrest the fall in WPI and that RBI may cut another 25 basis points in the repo rate. RBI, as underlined by the Governor Shaktikanta Das, is already seized of the necessity to improve the financing conditions in a bid to stimulate consumption and investment post-lockdown. Continuously rising fuel prices may boost inflation down the line.
Regardless of the way the above factors eventually play out, the post-COVID-19 world is not a return to the status quo. In fact, we are on the threshold of a new normal fleshed out by this pandemic in all aspects of life — businesses, professions, transportation, lifestyle, economy. Prime Minister Narendra Modi in a recent statement asserted that the nation will return to growth and promised more structural reforms. Exuding confidence, the PM said, “I will go beyond getting growth back to say Yes! We will definitely get our growth back.” Elaborating on Atma-nirbhar Bharat or Self-reliant India, he stated, “Getting growth back is not that difficult and the path to that is Atma-nirbhar Bharat.” Indeed, in a best-case scenario where the pandemic is on the retreat, consumption is likely to come back, aided by the thrust from the pent-up demand, providing the indispensable impetus to the economic cycle and lifting all boats in its wake.
Whereas a post-pandemic growth is a given, the new normal dictates that the return to normalcy will not bring good tidings to everyone. In the post-pandemic world, consumers will cathect onto the pandemic-induced parsimony, and choose to spend on the bare essentials of life. An increased predilection to save and hoard cash will be prevalent. Spending selectively will create unique winners and losers. Businesses likely to benefit in this new normal are pharma and healthcare; personal transportation; hygiene products; digital and e-commerce; and food and beverages. On the flip side are businesses such as travel, tourism, and hospitality; public transportation; air travel; hotels, resorts, and restaurants; and malls and multiplexes.
It is amply evident that the post-pandemic world will bring a new normal creating a unique landscape of personal, professional, economic, and business imperatives, creating distinct camps of winners and losers, which tendencies are already becoming apparent. On the other hand, large, cash-rich corporates will continue to not only survive but also grow and gain in the new normal.
All said, the elephant in the room is COVID-19. This black swan event shattered the old order through its first- and second-order effects, making any guesstimate of the future inflation outlook fraught. Based on the available evidence, a cautious outlook for a moderate pickup in growth seems tenable. However, a steep inflation curve can be ruled out for now. A return to a 4–5% inflation rate in the immediate future will herald a recovery of sorts. The protracted economic slowdown even before Coronavirus and the ongoing pandemic showing no signs of abatement necessitate a strict vigil by the policy makers to ensure the May WPI deflation neither perpetuates nor devolves into a recession.
