Inflation Up, but so is Spending

After a brief slowdown in economic activity immediately following the double impact of demonetization and the imposition of the GST regime of taxation, it appears that consumers have returned to their earlier ways and with much more gusto. Middle income earners in India have been apparently throwing money on non-essential goods and services, such as going for movies, getting beauty treatments at spas and salons, and even eating out more often than they might normally otherwise do so. While this paints a positive picture for an economy returning to its earlier strengths, concerns are being raised by central institutions who have been more closely monitoring these events, worried that this current level of consumer activity is driving up core inflation, which could adversely affect these patterns in the long-term.

Restaurant owners have seen an increase in business in spite of GST causing an increase in the costs ranging from 15% – 25%, which they have passed on to the consumers. However, any increases in the Reserve Bank of India’s target inflation rate of 4.7 percent will likely result in the RBI raising interest rates yet again, possibly on multiple occasions, before the end of the year. On the other hand, with the current BJP government at the center looking to make a bid for another term in office, raising of rates will hamper the growth that the present government will seek to promote as part of its message of success, and there could be a possible tussle to attempt to maintain interest rates to keep up the momentum. However, it is this same momentum which could give rise to what is being labelled an “inflation landmine”.