There is a China hand in India's inflation, one important reason why the steady rise in interest rates may not be cooling the high inflation. About 25% of imported inputs that go into manufacture of goods produced locally are imported from China. In addition, a third of consumer goods imported into India come from China.
The inflation in goods exported by China was 10% in July, much higher than its overall inflation of 6.1% during September. "Since a majority of India's imports of manufactured goods come from China, higher nonfood inflation there is feeding into higher prices in India through tradeables," said Bibek Debroy, professor at the Center for Policy Research, a think tank.
The 15% appreciation in the China's currency during the last six months has added to the rising labour costs in the country, making manufactured products expensive. In fact, not only India, but almost the entire world is feeling the impact of the higher export prices from China, the country's biggest trading partner now. A report by the International Monetary Fund on Thursday has devoted extensive space to analyse the impact China's high inflation on other countries.
China's supply and demand shocks can have significant spillovers to the region, the study concludes. This imported inflation is adding to the general rise in input costs, higher interest payments and wage pressures, making the monetary policy ineffective in taming inflation. "Rate hikes can't affect prices of tradeables by lowering demand.
So, to the extent the price rise in manufactured goods is imported from China, monetary policy cannot deal with it," said Ajay Shah, professor National institute of public policy and finance. Out of India's total imports, 27% of iron and steel, 18% of chemicals, 24% of manufactured metals come from China where annual non-food inflation rate is at a 10-year high. According to the September wholesale price index (WPI) estimates, the inflation in iron and semis, basic metal products/alloys and chemicals was 21%, 11% and 9%, respectively.
In addition, imports of other manufactured goods, such as projects goods and machine parts, 25-50% of which is sourced from China, are used as inputs for production of final goods. Therefore, price rise in China also pushes up prices of such final goods. "Rising export prices from China will likely add some inflationary pressure to the rest of the world," a recent report by Nomura said.
The export price index for Chinese goods rose by 10% y-o-y in July 2011, driven by a 13% annual rise in wages since 2005 and 15% appreciation in Yuan over the last six months. Principal advisor in the planning commission and former chief statistician Pronab Sen sees a bigger impact of China's inflation in the future.
"So far, we haven't seen the full impact of the wage rise in China on Indian prices, the major effect will come later," he said. The point is underscored in the IMF analysis as well. "Chinese inflation has been relatively elevated in recent quarters, and demographic and policy changes (such as the removal of subsidies on input costs) are expected to result in a structural increase in inflation over the coming years", the IMF report says.
Saturday, 15 October 2011
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