Low consumer inflation has been one of the key highlights of the Narendra Modiled National Democratic Alliance (NDA). Helped by fortuitous tailwinds from low crude prices and a sharp dip in food inflation, consumer price inflation fell to 3.6% in fiscal 2018 from a high of 9.9% in fiscal 2013.

That said, credit for the decline in inflation also goes to NDA’s policy stance. A prudent fiscal policy has meant lower pressure on inflation. Restraint in raising minimum support prices (MSPs) for crops also contributed to lower food inflation. The government also adopted an inflation targeting framework, which meant sharper focus on inflation control from the Reserve Bank of India (RBI).

But the scenario is now changing and inflation is set to pick up this fiscal after declining continuously since fiscal 2014. We expect Consumer Price Index (CPI)- based inflation to average 4.6% this fiscal with a base effect-driven higher inflation in the first half versus the second half.

True, the economy is expected to grow faster at 7.5% in fiscal 2019, but that’s not the reason for the inflation pick-up. Inflation will rather be driven by acyclical factors that are less dependent on a cyclical upturn in the economy:

Higher crude oil prices: Brent crude prices have risen sharply. With shrinking global oil surpluses accompanied by strong global recovery, sustainability of current trend and even an upside to the currently prevailing crude oil prices cannot be ignored. The government can neutralise the impact of rising global crude oil price by reversing the excise hike, which was effected when crude prices were falling, but not without an associated fiscal cost.

Rise in MSP: Food inflation could also move up as the government promises higher MSP, increase in its coverage, and a mechanism to ensure that farmers do not suffer price falls below MSP as it happened in the last fiscal. Market prices of crops could fall in a year when normal monsoons and record agricultural output is being predicted.

Weaker rupee: Weakening rupee, together with tariff increases in some sectors, will raise the imported cost.

Additionally, metal prices – steel, copper and aluminium – have all been firming up and this will raise input costs for corporates.