The Weekend Leader - Killer Prices: High inflation dents savings, threatens recovery

Killer Prices: High inflation dents savings, threatens recovery

New Delhi

12-July-2021

Photo: IANS

High rate of retail inflation has not only dented household savings, but is now threatening the viability of a sustainable economic recovery post-lockdown 2.0.

Prices of petrol, diesel, edible oils, and a whole lot of other essentials have sky-rocketed in the recent past due to high domestic taxation and global factors such as rising demand from China.

This has led to a sharper than expected inflation rate that has stubbornly stood at over 6 per cent in June and May.


Besides, denting the economy, the trend impacts the pent-up demand and cancels out the positive impact of low interest rates which are brought down to boost the economy.

In terms of households, the 6 per cent plus inflation rate has dented the household savings rate which was already eroded due to wage cuts and job losses.

The latest data from the Reserve Bank of India indicates that there has been a sequential decline in household savings as a percentage of GDP in Q3FY21 from the highs of Q1 or Q2.

The preliminary estimate of household financial savings is placed at 8.2 per cent of GDP in Q3 2020-21. The moderation was driven by a significant weakening in the flow of household financial assets, which more than offset the moderation in the flow of household financial liabilities.

The moderation of household savings is also a direct result of falling bank interest rates, even with inflation remaining high. This actually means that an individual savings in bank is not yielding any positive value but is only covering for inflation meaning you are actually dissaving by putting money in banks.

Similarly, economic activity has been largely hampered due to the fact that Reserve Bank's ability to loosen the monetary policy further gets curtailed in the face of such high inflation numbers.

One of the worst hit of high inflation has also been the MSME sector as higher inflation has pushed up war material prices increasing the overall price of products and making it uncompetitive in the global markets

The increase in costs of raw materials is affecting the MSMEs which are already struggling because of pandemic impact and squeezed working capital, PHD Chamber of Commerce and Industry President Sanjay Aggarwal said earlier.

The RBI has projected India's retail inflation for the current financial year at 5.1 per cent. It has a set a range of 2-6 per cent for retail price based inflation.

In India without low interest rates, purchases of automobiles, houses and other items get delayed or put-off, and this trend unleashes a negative multiplier effect on the industry.

On Monday, the latest data showed that June retail inflation eased up on a sequential basis but still managed to remain above the 6 per cent threshold.

The Consumer Price Index (CPI) slipped to 6.26 per cent last month from 6.30 per cent in May.

However, the Consumer Food Price Index (CFPI) increased to 5.15 per cent last month from 5.01 per cent in May.

The CFPI readings measure the changes in retail prices of food products. This, along with rising price of edible oil, has turned the budget of Indian kitchens upside down.

India imports more than half of its vegetable oil consumed in the country. The import price of vegetable oil have shot up by over 50 per cent in last few months, not only raising India's import bill but also increasing the price of cooking oil for households.

The inflationary pressure on the economy has also been aided rising price of the petroleum products, particularly petrol and diesel that is now being retailed at over Rs 100 a litre in various parts of the country. In the absence of any duty relief from the government, fuel prices have upset household budget further and is taking the economy to position where demand generation would become increasingly difficult.-IANS



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