India's inflation situation very alarming: Kaushik Basu

Basu cautioned that if retail inflation follows wholesale prices, it might lead to 'inflationary crisis'

India's wholesale price-based inflation is at a 30-year high, leading to a "very alarming" situation for the country, former World Bank chief economist Kaushik Basu said on Thursday.

He, however, doesn't see any risk of hyperinflation, but cautioned that if retail inflation follows wholesale prices, it might lead to "inflationary crisis".

Participating in a virtual event organised by the Asia Society, India, Basu said the inflationary situation in India is at a "very risky bend".

Read more: India's June WPI inflation eases to 12.07%

"There is a big risk of inflation and actually one particular kind of inflation. If you look at wholesale price inflation in India. Right now it is at a 30-year high," he said.

Basu added that "generally wholesale price inflation seeps into retail price inflation, so that this is a very alarming situation for India because prices are rising quite rapidly".

Basu, who served as a chief economic advisor to the government of India during 2009 to 2012, has written a new book titled Policymaker's Journal: From New Delhi to Washington DC.

The eminent economist said the "inflationary situation is at a very risky bend...where you need intertwining of monetary policy and fiscal policy".

Stating that India needs a much better curation of policy once again between the Reserve Bank of India and the finance ministry, Basu said, "I feel not enough is happening once again between the Treasury, the finance ministry and the central bank for the inflation."

He cautioned that there is a big risk of inflation going to be higher, though not huge.

"I don't think there's any risk of hyperinflation or anything like that in India," he opined.

"But it can go higher and if the retail prices begin to follow the wholesale prices, it is a major inflationary crisis, already, because the poor people have been hit so badly by the crisis," he observed.

Read more: US inflation to remain high for months before falling: Fed's Powell

The wholesale price-based inflation eased marginally to 12.07 per cent in June as crude oil and food items witnessed some softening in prices, while retail inflation slipped a tad to 6.26 per cent in June although it remained above the comfort level of the Reserve Bank for the second consecutive month in a row.

Agreeing with Basu, former Chief Economic Adviser to the Government of India Arvind Subramanian, who was also participating in the event, said that he is actually a little bit more worried about inflation than he used to be.

"I'm very worried about inflation. First of course, you know, it's possible that we don't know but the global situation itself could turn a little bit more inflationary in the next one or two years," Subramanian said.

He further said "the pie (resources) is shrinking in India and conflicts over the pie are rising very sharply".

"You see that in agriculture, you see that in the individual state saying no employment for people outside. All these are signs, both that the pie is shrinking," Subramanian noted. According to him, if this pie doesn't grow very rapidly, then these conflicts will exacerbate and one of the key manifestations will be higher inflation.

On Goods and Services Tax (GST), Subramanian said that there is a need for simplification of GST rates.

"Some of the GST rates have to be increased... GST design has to be countercyclical compensation," he opined.

Subramanian also said GST requires lots of cooperation between the Centre and the states.

Subramanian, who was appointed CEA on October 16, 2014 for a period of three year and was given an extension in 2017, pointed out that India's economic growth in the last 30 years was driven by exports.

"There is no economic model in the world where a country can grow 8-10 per cent without high export," he said adding that in the last few years, "poverty has started rising again".

On the issue of globalisation, Basu said it is "going to come back with a vengeance, and the world will see new winners and losers..."

"I think globalisation is hitting roadblocks and it will continue to stumble for a couple of years, but I have no doubt in my mind that it is going to come back and come back actually with a vengeance. So countries which make the mistake of nationalism and hyper nationalism and closing down will be the losers in the new world, that is going to come out," he said.