Surging input prices and rural eco disruption pose upside risks to inflation: CRISIL

Surging input prices and rural economy disruptions have begun to kick in, posing upside risks to CRISIL’s consumer price index (CPI)-linked inflation projection of 5 per cent for this fiscal, according to the credit rating agency.

In its base case, CRISIL Research expected CPI inflation to moderate to 5 per cent this fiscal from 6.2 per cent last fiscal. This was based on lower food inflation benefitting from the high base of last year and assuming a normal monsoon.

“However, upside inflation risks are clearly growing. On top of rising input prices, supply disruptions brought on by the intensification of the second Covid-19 wave in rural India are adding to the stock of inflationary pressures,” said Dharmakirti Joshi, Chief Economist; Adhish Verma, Senior Economist; and Pankhuri Tandon, Economist, CRISIL, in a report.

Referring to rising input costs, CRISIL Research said it projected Brent crude prices to average $58-63 per barrel in calendar year 2021 compared with $42.3 per barrel the previous year.

“Rising fuel inflation will keep core inflation high through elevated transportation costs and aggravate the spiral we are already seeing,” the economists said.

On the risk of upside pressure on food prices, the report observed that any shock to food prices can cause headline inflation to go off the mark, as food is the most volatile and largest weighted category in the CPI inflation group.

CRISIL Research flagged two risks on the food prices front -- pass-through of high global food prices and rural disruptions.

Pass-through of global food prices

The report underscored that global food prices have risen for 12 consecutive months now – the longest stretch in almost a decade. On average, they have registered a 30 per cent annual growth until April 2021.

Moreover, they may remain elevated given the surge in global demand (especially from China) amid subdued supply (caused by unfavourable weather conditions in several key agriculture commodity producing nations such as Brazil, US, Australia, etc.).

“While India is not a price taker in most food commodities, there is still some pass-through that could take place to the CPI food basket from high global food prices, especially through commodities such as edible oils and sugar,” the report said.

It referred to a recent Reserve Bank of India study, which suggested that a 10 per cent rise in global food prices could lead to a 0.7 per cent rise in India’s food CPI in the short run and 3 per cent in the long run.

Rural disruptions

CRISIL Research cautioned that the rising spread of Covid-19 infections in the hinterland, could lead to disruptions in food production as well as its transportation to the wholesale markets/mandis.

“In fact, data for April 2021 (when the second Covid-19 wave was rising and localised lockdowns were implemented in several states) does indicate that.

‘Any further rise in rural caseload necessitating further localised lockdowns could slow down mandi arrival rates even more and lead to upward pressure in the coming months,” CRISIL economists said.

Rising rural core inflation

A spatial analysis of CPI inflation data by CRISIL Research shows the sequential rise in rural core inflation was higher than that in urban in April 2021, a phenomenon not seen in the previous 16 months.

“Noticeably, when the pandemic was largely prevalent in urban areas in April 2020, leading to supply disruptions, urban core inflation had shot up. Rising rural core inflation this time around could be an indicator of a similar phenomenon,” the report said.

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