May 21, 20213 min read

Rising Covid spending, fuel prices to crowd out consumer demand: SBI report

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, putting a big question mark on overall growth that's still being driven by consumption demand, according to a report.

Soumya Kanti Ghosh, the group chief economic adviser at State Bank, in a note also noted 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, Ghosh said.

Item-wise inflation of health CPI shows a persistent month-on-month increase in inflation of non-institutional medicines, and X-ray, ECG, pathological 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, he said.

For example, overall CPI declined in April because of significant decline in food CPI, but when the relative prices of food items is compared to overall CPI the deceleration was not sharp as it was seen in actual food CPI. Similarly, for certain items like fuel and health the increase in relative prices is maximum. Interestingly, core CPI that declined 57 bps, increased in relative terms by 18 points.

According to him, given this, 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 the overall inflation basket, may jump to at least 11 per cent from due to the pandemic, Ghosh said.

This is likely to also result in a squeeze in expenditure on other items of discretionary consumption, a recipe for a cutback in consumer spending, he said.

Secondly, rising fuel prices since is having a direct impact on squeeze in consumer spending on discretionary items, other than on health which is currently unavoidable, he said. "And if we look at credit card spends since December, CPI computed inflation for the five month ending April is higher than the CSO estimate on an average by 60 basis points and the higher oil prices had forced consumers to ration out discretionary spends in December".

In fact, the share of non-discretionary spending has jumped to 59 per cent in April from 52 per cent in March and this does not augur well for the economy, he said.

The only way out is to cut oil prices by tax rationalization, otherwise, non-discretionary spending will continue to get distorted and crowd out discretionary expenses said the report and warned that this will also impart a clear upward bias in inflation.

Also, there has been an increase in the use of online delivery platforms which is not considered by the NSO, and if the NSO considers online prices, there will be a 10-15 bps impact on CPI inflation.

Thirdly, the rising commodity prices may lead to a rate hike by US Federal Reserve and all these three forces will make it difficult for the RBI to manage the conflicting targets of inflation, exchange rate, and adequate liquidity amidst weak growth.

The report attributed the massive spike in rural core increasing to 6.39 per cent in April from 5.85 per cent in March, to the increase in health inflation, the weighted contribution of which has increased to 0.50 per cent from 0.36 per cent in March. Inflation in personal care and education has also risen marginally.

The report further warned that health expenditure will rise significantly because of the pandemic. It may be noted that health expenditure was around Rs 6 lakh crore or 5 per cent of the private final consumption expenditure (PFCE).