Ideally, ANZ Research believes the government could move to open up the coal sector to private businesses and deregulate the sale of urea. Urea is perhaps the most symbolic of the reform problems inherited by Modi. Heavily distorted fertiliser prices have contributed to inefficient use, making food inflation all the more difficult to tackle. Instead, the small changes available are limited to improvements in land acquisition laws, goods and services tax implementation and the removal of some foreign direct investment restrictions. These will still require the approval of the upper house but are less controversial.
"The new government has installed greater business confidence with power production and investment spending increasing significantly."
Devika Mehndiratta, Senior Economist, ANZ
As a result, inflation in 2015 is likely to rest above 7 per cent in the second half of the year, well above the Reserve Bank of India’s target of 6 per cent for the commencement of 2016. The previously high levels of inflation have been hurting consumer confidence, with rates above 10 per cent over the past 3 years placing pressure on incomes. This pressure is likely to resume come 2016.
India’s economy is nevertheless making a gradual recovery.
In the immediate term, a weaker than usual monsoon has positively affected food prices for consumers and a fall in the price of crude oil will see inflation come down to around 6 per cent in October/November from the current 7.8 per cent.