December, 2021 Newsletter
Soaring WPI Inflation in India
Wholesale Price Index (WPI) is released on the 14th of every month (or next working day) with a time lag of two weeks of the reference month and compiled mwith data received from institutional sources and selected manufacturing units across the country.
As reported on Dec 14, 2021; WPI inflation in India jumped to a 12 year high of 14.23% in the month of November highest since April 2005. This is primarily due to the rise in prices of fuel and power, crude petroleum and food products, as compared to Nov 2020 (2.29%).[RBI used to implicitly target wholesale price inflation at around 5%]
Experts fear that the sharp rise in wholesale prices will lead to a jump in retail inflation.
A rising gap has been observed between retail inflation and wholesale inflation over the past few months. Many manufacturers across sectors have tried absorbing higher input costs incurred by them, but most of these firms are expected to pass on the burden to customers as they struggle to maintain the status quo.
While retail inflation has remained at 4.91% which is below the RBI’s target of 2-6 per cent, it is likely to increase further in 2022 as domestic demand rises, especially at a time when companies have increased the prices of their goods.
A jump in retail inflation could slow down the pace of economic recovery as the central bank would be forced to hike key interest rates that are crucial for boosting growth.
Sri Lanka BoP Crisis
Sri Lanka is going through a balance of payments crisis very similar to the one India went through in 1990. By the end of 1990, India had enough reserves to pay for barely 3 weeks of imports.
By the end of 2021, Sri Lanka has reserves to cover only a month’s.
Since 2014, Sri Lanka has borrowed heavily reaching 42.9% of the country’s total GDP. Surprisingly China owns only 10% of Sri Lanka’s debt with the bulk of it owed to international capital markets. When the pandemic struck its heavily tourism-dependent economy (accounting for over 10% of GDP), the ratio climbed to 101%.
Now the payments on these foreign loans are coming due.
Rating agencies have downgraded the country from B- to CCC+ as per S&P.
To add to these woes, the government rolled out a plan to become the first country to become 100% organic in agriculture by imposing a ban on inorganic fertilizers and pesticides.
This led to a drop of 50% in farming output. The tea sector, which is Sri Lanka’s single biggest export bringing in more than $1.25 billion a year making up almost 10% of the country’s export income, was hit particularly hard.
Directions from the country’s central bank to maintain an artificially fixed rate have seen a parallel black market emerge, as businesses have struggled to find hard currency.
The government has resorted to several measures like banning non-essential imports, shutting down its refinery as it can’t pay for crude and closing foreign missions in order to save forex. They are negotiating with China, India and Middle Eastern countries for lines of credit, currency swaps in order to avoid going to the IMF for a rescue package.
Things look pretty bleak for now.
NFHS-5 Malnutrition Data
The National Family Health Survey (NFHS) is a survey conducted by The Ministry of Health and Family Welfare (MoHFW) with the coordination of IIPS, Mumbai.
The report has shown some positive & negative changes in comparison with NHFS-4.
NHFS-5 has shown major positive changes in vaccinations, Infant mortality and education. The total fertility rate has been falling and is at 2.0. The sex ratio at birth has been at 952/1000 and Sex ratio for adults has crossed 1020 women per 1000 men.
The case of Malnutrition:
NFHS data shows that rural stunting has been high in rural households 37.3 % compared to urban areas with 30.1%. The data reveals there has been a marginal overall improvement in Stunted growth under 5 years age down from 38.4% to 35.5% and the number of children who are underweight (less weight-for-age) has come down from 35.8% to 32.1% compared to NFHS-4.
However, 1 out of 3 children under five years have stunted growth and is underweight. Poshan Abhiyaan launched in 2018 aimed at decreasing malnutrition by 3 percentage points every year.
Obesity among children has shown a substantial increase showing malnutrition which may increase the non-communicable disease.
There has been an alarming rise of 8 percentage points in the fraction of children suffering from anaemia from 59% in NFHS-4 to 67% in NFHS-5. As schools were shut indefinitely, mid-day meal programmes, which are the primary source of supplementary nutrition for millions of children across the country, were impacted.
The government needs to isolate the districts with more malnutrition and provide urgent intervention.
Turkey Economic Crisis
WHAT
Turkey’s Inflation rose to 36.08% last month, up from 21.3 % in November-19 year high- on the back of a weakening lira that is driving up the cost of food and other basic goods.
The currency mounted a significant comeback after the government announced the rescue plan but was still down more than 40% against the U.S. dollar last year. Yet the main factor in the rally was not the deposit insurance program but the central bank, which spent billions of dollars from its shrinking reserves to buy lira.
WHY
Turkey’s economy has been in turmoil since last year when President Recep Tayyip Erdogan pressured the central bank into slashing interest rates despite rising inflation. Mr Erdogan has fired a series of central bank governors and other top officials who opposed his unorthodox vision for the economy, which calls for cutting interest rates to encourage growth, despite high inflation.
The not so mystique Omicron
The latest variant of the coronavirus has let rip at such a ferocious pace that forecasters are still catching their breath, and it will be some time before its economic effects become apparent in the official data, which are published with a lag. But a number of speedier, albeit partial, indicators can provide some insight into how consumers and workers may be adjusting their behaviour.
All eight high-frequency indicators tracked by Bloomberg News were steady last month, keeping the needle on a dial measuring the so-called ‘Animal Spirits’ unchanged at 5. The level was arrived at by using the three-month weighted average readings to smooth out volatility in the single-month scores. But the pace of activity -- based on indicators from demand for services to factory output -- faces threats from rising cases of the omicron variant.
OECD chief economist Laurence Boone said there are two possible scenarios that could emerge if the impact of the Omicron variant triggers a global crisis.
“One is where it creates more supply disruptions and prolongs higher inflation for longer. And one where it is more severe and we have to use more mobility restrictions, in which case demand could decline and inflation could actually recede much faster than what we have here,” she said.
Boone added that a “more evil” Omicron variant could force governments to dish out emergency aid in order to protect businesses and households. “That could be a scenario where we need more fiscal support at this stage.”
The spread of the Omicron variant could also lead to the US Fed being forced to delay the tapering of its bond-buying program by a few more months to ensure that growth does not lose steam for the world’s largest economy that has got used to the free dollar to maintain sustainable growth.
This would have a direct positive impact on the Indian stock markets with the FIIs (foreign institutional investors) having enough liquidity to continue to invest in Indian companies. That, in turn, would allow many Indian companies to go for IPOs in the coming months.
Depreciation of INR
In recent months FIIs have pulled their money out of the Indian stocks due to lofty valuations and a lowered outlook for equities by Goldman Sachs Group Inc. and Nomura Holdings Inc. Recent announcement by the federal bank about tapering and increase in interest rates has also led to an outflow of funds. Record high trade deficit has also put pressure on the rupee.
Amidst all the short-term pressure on the Indian currency, the good news is that forex has grown, which is now about $640 billion. So, there is no immediate concern about it.
Another positive for India is the estimated growth rate which is around 8.1% for FY22 and it would lure the FIIs once lofty valuations cool down and clouds of another wave are over.