PM Modi may discuss state of economy in Cabinet meet

PM Modi may discuss state of economy in Cabinet meet

Prime Minister Narendra Modi. (PTI photo)

Declining imports, indicating a well-entrenched slowdown, and inflation likely to raise its head in coming months aided by higher milk and medicine prices has put the government on its toes, with Prime Minister Narendra Modi expected to discuss measures to pump prime the economy in a full Union Cabinet meeting later this week.

The meeting will be held after the crucial GST Council on Wednesday, which of late, has shed the idea of any hike in a levy on goods and services impacting the common man.

Retail inflation, which has already reached 5.54% in November, is expected to go up further in December and January because of the latest hike in milk prices by about 5% and drug price regulator allowing a one-time increase of about 50% in key antibiotics, certain vitamins and anti-allergic drugs among others.

Milk and medicines have significant weight on the consumer price index, which is already up due to skyrocketing onion and other food prices. A back-of-the-envelop calculation shows, the headline CPI inflation could have been less than 3.5% if vegetable prices had not hit the roof. In CPI basket food articles have the highest weight of over 45%.

Usually, rising food prices do not pose much worry to the policymakers as their impact is transient but the rise in milk and medicine prices, which are going to stay, may lend a long-term impact on consumer price index. Rising telecom tariff, which will reflect in the CPI basket in the coming month, is another worry.

If food price inflation persists long enough, it gets generalised and starts affecting other goods and services. In an already slowing economy, the generalised price hike, then, begins to show the signs of stagflation – a combination of slow growth and persistent high inflation.

"Now, the worry is that high inflation may stay longer than our estimate," an official told DH. The Reserve Bank of India (RBI) has forecast CPI inflation to come down below its target range of 4% by July-September 2020. If that is delayed and growth continues to slow down further from 4.5% in the September quarter, India may stare at stagflation, a situation, which is difficult for the policymakers to handle.

The Finance Ministry is expected to give a presentation to the Prime Minister on how it is expected to revive growth when consumption is down, demanding more tax cuts for individual taxpayers but weaker government fiscal, due to lower collection of revenues and increased expenditures, indicates the government must be tight-fisted.

The latest data on imports shows the demand for petroleum, engineering and industrial items, are almost muted. Petroleum products consumption data is a leading indicator of the performance of an economy.

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