Along a lane in a Mumbai neighbourhood lined with chai stalls and vegetable carts, visitors usually have to dodge commuters, motorcycles and even animals to shop. But now, like so many streets in India, it is unsettlingly quiet.
Vijay Kotian, a 35-year-old selling vegetables, fruit and pulses from his roadside perch, faced a paradox. There were fewer buyers for his fare, but prices were higher.
“Customers are getting angry because prices are increasing from Rs20 to Rs40 to Rs50 [$0.20-$0.68],” he said, citing tomatoes as an example. “They ask why I’m increasing my prices. But it’s not me.”
Mr Kotian’s predicament encapsulates a challenge for India since the coronavirus pandemic struck in March: stubbornly high inflation despite a huge economic contraction.
Retail inflation remained above the Reserve Bank of India’s mandated target of 6 per cent for eight months from April, soon after the country entered a months-long lockdown. It touched a six-year high of 7.6 per cent in October.
The consumer price index finally fell within the RBI’s target at 4.6 per cent in December, thanks partly to a drop in vegetable prices, providing some respite to low-income shoppers struggling to fill shopping bags and politicians fearful of popular outrage.
But economists have warned that India, which for years has struggled with runaway price increases, must balance the urgent need to revive growth with keeping food, transport and commodities prices under control.
“The key question that comes with inflation is: is this a return to the dark ages or are these passing dark clouds?” said Aurodeep Nandi, an economist at Nomura.
While he did not believe it was the former, Mr Nandi warned that “there are still dark clouds looming ahead”.
High inflation has long been a source of concern to Indian authorities as demand from the fast-expanding economy and population exacerbated goods shortages. After years of mixed responses, the central bank in 2016 adopted an inflation-targeting mandate in order to try and manage the imbalance.
Anger over high onion prices has been linked to the downfall of more than one government. In September, Narendra Modi’s government banned onion exports because of concerns over soaring prices.
The drop in food inflation in December partly reflected the patching up of supply chains that were upended by India’s strict lockdown, which limited the availability of transport and labour.
But other measures of inflation have showed signs of pressure that predate the pandemic, picking up after several years of comparatively tame price rises. Core inflation, which excludes food and fuel, remained stubbornly high last month at 5.6 per cent, compared with 5.8 per cent in November, according to brokerage Edelweiss.
That continued even after the lockdown brought growth to a halt. India’s economy is expected to shrink more than 10 per cent in the year ended March, according to the IMF. The country has recorded more than 10m coronavirus cases, the world’s second-highest tally, and more than 150,000 deaths.
Anxiety over inflation has prevented the Reserve Bank of India from cutting interest rates since May, and many economists expect it to continue holding off in the months to come — due partly to accelerating commodity prices.
The economy has shown signs of improvement from its lows last year, with indicators including manufacturing, railway traffic and tractor sales picking up.
But Shumita Deveshwar, an economist at advisory firm TS Lombard, said inflation could complicate India’s recovery.
Tepid private investment, which has been trending lower since 2018, has exacerbated the country’s chronic supply-side shortages, such as the infrastructure needed to get vegetables from farms to shops. This results in significant price mark-ups that stoke inflation, she said.
“This is an age-old problem for India,” said Ms Deveshwar. “As growth recovers and demand starts to pick up, what we will see is supply lagging demand, which basically recreates the conditions” for inflation.
Recent agricultural reforms introduced by Mr Modi and aimed at allowing farmers to sell directly to private buyers rather than state-backed market yards could streamline supply chains and reduce some of these inflationary inefficiencies.
“If [the reform] is run the way it’s meant to be, I’d think we’d be in for much better-behaved food inflation,” said Radhika Rao, an economist at DBS.
The contentious laws, however, were suspended by the Supreme Court following a backlash from farmers.
Inflation in other areas continues to cause problems. Many automakers, such as India’s largest, Maruti Suzuki, raised vehicle prices this month citing, in part, high commodity prices.
A survey of manufacturers by IHS Markit in December found that inflation in input costs, such as materials and labour, had risen to the highest level in two years.
All the while, India’s economic recovery remains tentative. Industrial production in November dropped 1.9 per cent, according to data released this month.
Even as Covid-19 infections have dropped from nearly 100,000 a day in September to fewer than 20,000, some economists fear that a resurgence in cases could hamper the turnround.
For Vinod Prasad, a 57-year-old vendor selling towels in Mumbai, inflation remains a worry, with prices about 20 per cent higher than before the lockdown.
And there were few signs of an economic revival. On one recent evening, he had yet to make a single sale for the day. “No one comes,” he said.
Additional reporting by Andrea Rodrigues