The massive increase in healthcare spends, especially in the hinterland, steadily rising fuel prices and online delivery of articles will increase inflation pressure much higher on one hand and crowd out other consumer spending on the other. This will put a big question mark on overall growth that is still being driven by consumption demand, according to an SBI report. 

Soumya Kanti Ghosh, the group chief economic adviser of State Bank of India (SBI), in a note has said that the steep fall in retail inflation in April to 4.29 per cent from 5.52 per cent in March is deceptive, as the CSO inflation number is primarily due to easing food prices as the rural core inflation has jumped to 6.4 per cent. 

As the pandemic rages through the country, it is worthwhile to look beyond the headline inflation, as the rural core has now jumped to 6.4 per cent in April and will rise further in May. The increasing health spend due to the pandemic is having a meaningful impact in rural areas, Mr Ghosh has added. 

Item-wise inflation of health CPI shows persistent month-on-month increase in inflation of non-institutional medicines and X-ray, ECG and pathology tests. Therefore, the headline inflation may not be correct to look at. A more important price concept is the relative prices which are not a monetary phenomenon but their movements convey important information about the scarcity of particular goods and services as now, like health, Mr Ghosh has said. 

According to Mr Ghosh, there are three key points to assess the price pressures, such as health, fuel price and rising commodity prices. Health expenditure, which currently constitutes 5 per cent of overall inflation basket, may jump to at least 11 per cent due to the pandemic. This is also likely to result in a squeeze in expenditure on other items of discretionary consumption, a recipe for a cutback in consumption spending, he has said. 

Secondly, rising fuel prices is having a direct impact on a squeeze in consumption spending on discretionary items, other than on health, which is currently unavoidable. “And if we look at credit card spends since December, CPI-computed inflation for the five-month ended April is higher than the CSO estimate on an average by 60 basis points and the higher oil prices has forced consumers to ration out discretionary spends in December,” opines Mr Ghosh. 

The only way out is to cut oil prices by tax rationalisation. Otherwise, non-discretionary spends will continue to get distorted and crowd out discretionary expenses. This will also impart a clear upward bias in inflation, the report has warned.