MPC members’ concerns with inflation are exaggerated: Badrish Kulhalli, HDFC Life

In a chat with ET Now, Mythili Bhusnurmath, Consulting Editor and Badrish Kulhalli, HDFC Life, discuss macro cues and the impact of demonetisation on the economy.

Edited excerpts:


IMF’s Christine Lagarde said demonetisation as well as the GST regime requires active courage and the bankruptcy code is very positive for India’s economic growth. How would you like to react to these statements?

Mythili Bhusnurmath: While bankruptcy code and GST are certainly acts of courage and one must compliment the government for it, as far as demonetisation is concerned, it is interesting to find the IMF sings a very different tune now because soon after demonetisation, the IMF had in fact lowered the estimates for India’s GDP growth precisely on the grounds that demonetisation would be disruptive and now it has suddenly done an about turn.

Hindsight is always 20:20 but it is interesting to see IMF sing a very different tune as have many other people because surprisingly the Indian economy has held out. We will have to see whether in fact there is a lagged effect of that demonetisation which we are yet to see but as of now, demonetisation does not seem to have done as much harm as before. As of now and seem are two caveats that I would like to attach.

We are not really very sure that the impact of demonetisation has been fully played out and whether the economy would have grown faster but for demonetisation. What is your view?

Badrish Kulhalli: It would be a hypothetical point whether India would grown faster but for demonetisation. But it is true that the impact of demonetisation till now is not as bad as feared. We have seen growth numbers come back. I would still say the growth numbers which were put out by the government may still see some revisions going ahead but the jury is out on the fact that anecdotal evidences show the pickup has been quick as has been resilience.

The impact of demonetisation has not been as bad as feared and as for the lagged effect, we need to see some more company results in this quarter to understand the actual impact and then we need to wait to see the next quarter results that is the April to June quarter to understand whether the recovery has been full.

Mythili Bhusnurmath: The MPC minutes have just been released shows MPC seems to have been largely “indifferent” to what is happening on the growth front and seems to have focussed considerably on inflation except for one member who perhaps felt that inflation is going to decline. All the other members in fact felt that inflation is still a big bugbear going forward. In fact El Nino which is one of the factors that they attribute for the fears on the inflation front, now with the IMD projection seem to have been largely exaggerated. Should MPC shift focus from inflation to growth?

Badrish Kulhalli: I would agree with you that the MPC members’ concerns with inflation are exaggerated. The rise in inflation that the MPC members are seeing are more because of supply side or I would think statistical-led factors. Things like HRA adjustment will cause a statistical rise in inflation. It is not something which is caused by increased demand for housing or lack of supply of housing.

Number two, GST also is more of a one-time impact on different levels of taxation. I would think that in fact GST may be less inflationary or deflationary because most of the basket items of CPI may see lower taxation rates. So I am not sure GST is going to be as inflationary but yes there could be some dislocation impacts on the price levels.

Thirdly, on El Nino and the probability of poor monsoon, we have to put in perspective that even though we assume that rainfall will be deficient and there will be an impact on the harvest, now the causality from poor harvest to price pressure is not very strong. The government has good levers in terms of buffer stock or import in food grains to control price pressures. So a poor rainfall possibly can affect prices of perishables or vegetables and fruits but beyond that cereals and pulses, would think they would have far better control on controlling food price inflation.

All in all, I would think that the concerns of the MPC members are led more because of one-time effects, statistical effects and supply-side effects which can be controlled to a large extent by government policies and action. It is not yet a scenario where you are seeing growth picking up and demand pressures coming back into the economy and manufacturers or suppliers having pricing power which will cause rise in inflation. In that scenario, if we get to situation of better growth and stronger demand, that is when I would be much more hawkish.