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FALL IN CONSUMER INFLATION WILL TRANSLATE INTO LOWER NOMINAL GROWTH AND MAY THEREFORE IMPACT TAX COLLECTIONS

15 Jan 2019

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Impact: Negative (Consumption, Tax Collection)

Brief: Consumer inflation has extended its three month long downward roll to December, 2018. With 2.19%, the consumer inflation stands just 19 bps higher than the lower tolerance limit of the RBI medium term inflation targeted range. Food items, which account for 39% in the overall consumer basket has deflated the consumer rate by 45 bps in December. Similarly, core inflation has moderately slowed down to 5.45% in December, 2018, which was 6.1% in June, 2018. The pace in core categories however gives a sense of stable demand supply equilibrium for non-food/fuel items. A major concern from the macro-economic perspective is nonetheless connected to the tax collection. This is because a fall in CPI inflation rate will impair the growth in nominal GDP and thereby tax collection. We note that the previous spike in crude prices has made it challenging for the Government to meet its fiscal targets.

As per December CPI data, the consumer inflation has extended its three month long downward roll to December, 2018. With 2.19%, the consumer inflation stands just 19 bps higher than the lower tolerance limit of the RBI medium term inflation targeted range. Food inflation, which has been in the limelight for past few months, has recorded (-) 2.5% contraction during the reference period. Food items, which account for 39% in the overall consumer basket have deflated the inflation rate by 45 bps. The main culprits in deflating overall food index are vegetables (-16.1%), pulses (-7.1%), and sugar (-9.2%); in turn, these products account for 21.5% in the overall food basket.

A trend of past 33 months reveals that sugar, pulses, fruits and vegetables are highly volatile commodities and move in a cyclical trend. On the other hand, inflation rate for cereals, meat, fish, milk and oil are less volatile. Price of the lesser volatile commodities has been moving in a range of 0 to 10%. For instance, over the last 33 months, cereal price has moved in the range on 1.25 to 5.34% - making it one of the stable food items considered here. Pulses price, on the other hand exhibit volatile tendencies and has moved in the range of (-) 24.7 to 34.2%, during the same period.

Similarly, core inflation has moderately slowed down to 5.45% in December, 2018, which was 6.1% in June, 2018. The pace in core categories however gives a sense of stable demand supply equilibrium for non-food/fuel items.

Even though it is understood that the domestic market is going through a liquidity challenges at this time, a steady growth in personal loans (+17.2%) augurs a strong private consumption. In YTD term, Private loan has been growing at 8.3% in FY19 as against 8.8% during the same time frame, the previous year. Not to mention the historic highs recorded in credit growth, which is currently pegged at 13.8% (as on November 2018).

A major concern from the macro-economic perspective is however on the tax collection. This is because a fall in CPI inflation rate will impair the growth in nominal GDP and thereby tax collection. We note that the previous spike in crude prices has made it challenging for the Government to meet its fiscal targets.