MacroScope

Resurging inflation to put a dampener on India’s festive spend

November 1, 2012

A perfect storm may be gathering over India’s economy, brought on by a peak in inflation just as the country’s festive season, which is critical to consumer demand, gets under way.

Purse strings are loosened most in India during this season, which began with Navratri on Oct. 15 and will linger on with the festival of lights, Diwali, in a couple of weeks and culminate with Christmas.

Navratri, which roughly translates to “nine nights,” and Diwali shopping in India is as important to the country’s retailers and manufacturers as Thanksgiving and New Year holiday shopping is to those in the U.S.

During this period demand rises for everything from edible oils and sugar, used to make an array of sweets that are crucial to festivity in India, to durables like electronics and cars.

That demand will be muted this year, partly because of high prices.

For the first time in three years, inflation is expected to peak in the last quarter before starting to ease, an analysis of the Reuters October poll and actual inflation data showed.

Slow growth – languishing near a three-year low – has further complicated matters, leading to fear of smaller festive bonuses from some Indian employees, and even job losses.

Saugata Bhattacharya, economist at Axis Bank said:

There is no indicator as such to track consumer demand in India. But, about 30 to 40 percent of total consumer spend happens in the festival quarter.

He expects a peak in inflation to weigh significantly on demand during this festive season, which will crimp growth.

The latest Reuters October quarterly poll median forecast predicts that growth will remain close to its three-year low during the last calendar quarter of this year.

Golaka Nath, economist at CCIL said:

A peak in inflation in the last quarter will impact growth. But, that’s (inflation) why RBI really is constantly watching and didn’t change the repo rate.

At its policy review meeting on Tuesday, the Reserve Bank of India (RBI) once again decided to keep key interest rates on hold despite crumbling growth and widespread appeals for a rate cut from investors, companies and even the government.

Instead, its Governor Duvvuri Subbarao, in an unusual move, explicitly hinted that the RBI might ease policy in the January-March quarter when inflation is likely to start cooling.

Inflation has peaked during the festive quarter only twice in the past seven years where, in four of them, higher supplies actually led to slower inflation during the final three months.

The Reuters poll points to an average 8 percent annual rise in inflation during the last three months of this year, which would be the highest quarterly rate in 2012.

Inflation hit a ten-month high in September, boosted by a hike in fuel prices during the month, just as the festival of Navratri began. Automobile sales are expected to be lower than previously forecasted this fiscal year.

Compounding things, prices for gold, India’s pet celebratory buy, are also expected to continue to rise, according to a Reuters poll, putting another dampener on the festive season.

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