India's Hidden Inflation Threat: School and Hospital Costs

  • Inflation in health and education faster than overall CPI
  • Services seen as long-term risk to central bank's target

Forget food. High on Indian central bank Governor Raghuram Rajan’s radar screen these days is the rising cost of services such as those at hospitals and schools.

Inflation has been hovering around 5 percent for health and 7 percent for education, outpacing the overall price index this year amidst a commodity collapse. Services, which account for about two-thirds of India’s $2 trillion economy, pose the biggest risk to inflation, Rajan said.

“Perhaps mid-next year or toward the end of next year, if you don’t see services inflation come down, you might have a bit more of an issue for the RBI in terms of how much scope it’s got to ease further,” said Faraz Syed, an economist at Moody’s Analytics in Sydney.

Services will play a key role in whether Rajan adds to 1.25 percentage points of interest rate cuts as he looks to reach a 4 percent inflation target for March 2018. Although comprising a smaller portion of the consumer-price inflation basket than food costs, services pose a greater policy challenge.

“It is hard to determine what capacity is in the service side,” Rajan told reporters last month after cutting interest rates for a fourth time this year. “Now there are some signs that they are coming down but that is the place we have to be very watchful.”

Consumer prices rose 4.4 percent in September, data released Monday show. As part of that, costs increased 5.4 percent for health services, 6 percent for education and 3.9 percent for food.

The inclusion of services in India’s consumer-price index helps explain the widening gap with the wholesale gauge, which has fallen each month this year. Rajan, who says CPI better reflects the inflation people face every day, switched benchmarks in 2014.

Higher incomes in the world’s fastest-growing large economy are pushing Indians to demand better medical services or education for their children, more comfortable transport or pricier holidays. However, demand is outstripping supply as poor schooling facilities and inefficient training methods limit the number of employable professionals.

What’s worse, there’s not much that Rajan or Prime Minister Narendra Modi’s government can do in the short run. While food prices can be influenced by adjusting supply or capping costs, services are related to human capital and may be caused by a lack of teachers or doctors, Rajan said.

“It’s not something that the central bank can control,” Syed said. “That’s a long-term structural issue.”

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