The Hindu Business Line : Watch out for inflation in next 2-3 quarters, cautions Deloitte

While economic recovery in India has been much faster than many other markets, there is a need to watch out for inflationary trends over the next 6 to 9 months, particularly in commodities, according to Mr Shanto Ghosh, Principal Economist, Deloitte India.

Inflation is bound to be a major issue. Unlike the inflation in the last two years which was based on solid economic growth, this time it would be tough to handle given the fact it is coming out of a recessionary phase, Mr Ghosh told Business Line.

“If the inflation of 2005-08 was demand-driven, this time it could be due to supply constraints. That is where it gets more alarming. If there is any further downgrade of India’s sovereign rating, it will question the sustainability,” he said.

‘Huge gap’

Mr Ghosh outlined Deloitte’s research insights based on various macro economic indicators such as wholesale price index (WPI), consumer price index (CPI), fiscal deficit and commodity prices and demand patterns. The gap between WPI and CPI is quite huge at double digits.

A slew of fiscal and monetary measures initiated by the Finance Ministry and the Reserve Bank of India, along with interest rate correction and stimulus packages, has helped the country tide over tough times, he argued.

The monsoon is below normal. This is likely to add pressure on supply and pricing of essential commodities. The prices of other commodities such as copper, nickel and crude oil have been volatile. The crude oil after a high of $145 a barrel slid to $30 and is now at $70. It is interesting to note that this reversal is not due to demand but the price of oil having firmed up due to stockpiling by China, he explained. The prices of steel and cement required for infrastructure are on an upward trend.

The Government has exhausted its policy intervention measures and instruments. There is very little scope for tinkering. Declining export pattern is a cause for worry, he said.

SUPPLY BOTTLENECKS

“Our insights show that we are in for supply bottlenecks due to reduced foodgrain output. Apart from the resilient service sector and now buoyant automotive sector, most other sectors such as textiles, heavy engineering consumer durables are showing signs of strain,” he said.

The large infrastructure and real estate too continue to be under pressure to perform. The flow of FDI into infrastructure has come down. However, real estate has a mixed pattern. The tier I cities continue to face pressure and tier II and II are doing well.

SHIFT IN ENGINE OF GROWTH

Referring to the Global Economic Outlook report brought about by Deloitte, Mr Ghosh said that their findings show a major reversal of trend. Most economic activity is driven by the US economy and China depended on exports.

This is likely to shift. With the US consumers tending to save, the US is likely to focus on exports. China, which is all through dependent on internal growth will focus on exports. This will bring about a fundamental shift where China will become focal point, he said.

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