Chief economic advisor Arvind Subramanian has been at the forefront of the cry asking India’s central bank to cut interest rates since it is hitting both India’s producers and also responsible for keeping the rupee strong. While RBI cites inflation concerns for going slow, Subramanian argues that India’s inflation has slipped into a low-growth cycle that RBI doesn’t seem to appreciate. The CEA has shown that, in six of the last 14 quarters, RBI has forecast inflation at 180bps (on average) higher than it actually was—and this is three-month-ahead forecasts.
Subramanian details several reasons for this, but chief among them is lower commodity prices globally, especially for oil, and the monsoon-proofing of Indian agriculture. With US shale profitable at $50 per barrel, Subramanian says this is an informal ceiling of sorts to global oil prices since, if it rises above that, US shale starts kicking in.
Well, the good news is that it is not just India’s central bank that doesn’t get it. Fed chief Janet Yellen has just said she doesn’t quite know what is keeping inflation so low. It’s difficult to say for sure, but just as China, and Walmart, were seen as the X-factor for decades when it came to drivers of inflation, that title seems to belong to Amazon that, by some miracle, seems to be able to continue to drive down prices everyday by cracking unknown inefficiencies in the supply chain.
Though etailing has hardly spread as much in India, the impact of an Amazon or a Flipkart goes beyond what they sell since traditional brick-and-mortar retailers are paring margins to the bone, and more, in order to compete. So the next time economists model drivers of inflation, perhaps the spread of etail should be listed as a variable. Economists, of course, included Amazon-like factors in their models in the past as well—anything that couldn’t be explained or the residual factor was, in many cases, called ‘total factor productivity’!