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With the wedge between retail and wholesale inflation coming down to as low as (-) 1.6 per cent in October, the Finance Ministry feels there is very limited scope for price pass-through. It simultaneously expects unemployment rate to come down further.
According to sources, the Ministry made these submissions before Standing Committee on Finance. Economic Affairs Secretary Ajay Seth and Chief Economic Advisor V Anantha Nageshwaran along with Chief Executive Officer (CEO) of NITI Aayog Parmeshwaran Iyer answered queries raised by members of the Committee.
“The pass-through of input costs appears to be complete with the narrowing of the wedge between CPI and WPI inflation,” a source said quoting Finance Ministry officials.
Retail inflation based on Consumer Price Index (CPI) slipped to 6.77 per cent in October, while producer inflation based on Wholesale Price Index (WPI) came down to 8.4 per cent. This shows the wedge has declined from a peak of (-) 10 per cent in November last year to (-) 1.6 per cent in October this year.
Officials explained that the decline in the wedge indicates only a limited scope for a future pass-through. “Going forward, the current retail inflationary pressures are expected to ease with fresh kharif arrivals and a pass-through of lower input costs to consumers, also affirmed by RBI’s inflation projections for the next two quarters,” the Ministry official told the Parliamentary panel.
Inflation projections
RBI has projected inflation for October-December quarter (Q3) at 6.5 per cent; and January-March quarter (Q4) of FY23 at 5.8 per cent, and risks are evenly balanced. CPI inflation for April-June (Q1) 2023-24 is projected at 5 per cent.
Officials highlighted positive development on the job front as well. It was said that the recovery in economic activities across sectors has improved the overall employment situation in the country. The PLFS (Periodic Labour Force Survey) shows the urban unemployment rate declining for the fourth consecutive quarter ending June. Net payroll additions in EPFO have witnessed double-digit growth in August, reflecting improved formalisation of the economy.
Officials quoted reports by two private companies (the Naukri Job Speak Index the TeamLease Employment Outlook) stating expansion in hiring by most of the industries. “With GDP growth in FY 2022-23 expected to be in the region of 6.5-7 per cent, the unemployment rate is expected to fall further by the end of the current year, particularly driven by the public and private capex,” officials said.
New jobs are also expected to get a boost on account of higher capacity utilisation. It was said that the corporate sector is also ready to invest, having strengthened their balance sheets through deleveraging while taking on fewer liabilities during the pandemic. “Their capacity utilisation has moved past 75 per cent, which is generally considered a benchmark for adding further to production capacity. Their relatively large profits in the first and second quarters of FY testify to their growing financial strength which is conducive to enabling higher investment in the economy,” officials told the Parliamentary panel.
The meeting was called to record oral submission ‘Overall Economic Outlook & Roadmap for $5 trillion economy’. Officials informed the committee that Covid-19 has pushed achieving $5 trillion economy by two years to 2026-27.
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