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Rising-price spectre

The data on inflation released by the Indian government’s ministry of statistics has confirmed fears of a rising-price spectre in the midst of an already-fragile economic recovery. Data released by MoSPI
  • CPI based inflation: The overall retail inflation in India, based on the consumer price index (CPI), was at 6% and has been rising steadily now since September 2021.
  • Food inflation: Food inflation is a potential concern, it was less than 1% in October 2021 but shot up to 5.4% overall and 5.9% in urban areas by January 2022.
    • The edible oils have consistently seen high inflation in their prices apart from the usual suspects of fruits and vegetables. The cereal inflation is also worrying which jumped to 3.4% this year after eight months of negative inflation.
  • Price rise of cereals: within cereals it is primarily, Maize, barley and wheat have witnessed double-digit inflation after negative inflation until the second half of 2021-22.
    • It is partly due to the indirect impact of a rise in petroleum prices, which tend to push up the prices of food crops that are used for ethanol production as a fuel substitute.
    • The prices of all these crops have seen a rise in international markets as well, and the food price index of the Food and Agricultural Organisation (FAO) is at its highest level ever.
  • Trends of WPI:It shows a worrisome trend in the country’s wholesale price index (WPI), which has seen 10 straight months of double-digit inflation.
  • Production of food grains: It comes at a time in agriculture production including that of foodgrains has reached record levels. Food production in India is expected to cross 300 million tonnes again this year by recent official estimates.
    • The stock of foodgrains in India’s central pool went up to 87 million tonnes, which is more than four times our buffer norm requirement of 21 million tonnes.
Inflation surge due to unfavourable base effect
  • The Reserve Bank of India (RBI) has said that the increase in inflation in December 2021 was entirely due to unfavourable base effects despite month-on-month decline in prices.
Base Effect
  • The base effect is the effect that choosing a different reference point for a comparison between two data points can have on the result of the comparison.
  • It refers to the impact of an increase in the price level (i.e. previous year’s inflation) over the corresponding rise in price levels in the current year (i.e., current inflation).
  • For instance, a “3% year-over-year increase in May” after an already elevated price level in May of last year would imply higher price levels than a “3% year-over-year increase” after a depressed price level in May of last year.
Global Food Price inflation
  • The food price inflation is also driven largely by cereals and edible oils just like India’s case.
  • It affects the prices of those cereals that are closely related to international hydrocarbon-market prices, particularly of those crops that can be used for ethanol production.
  • The international price transmission has pressured domestic prices of cereals higher in India.
Road ahead
  • Protecting the vulnerable & extending PMGSY: The endeavour should be to protect vulnerable sections of the population from the effects of inflation. The high stocks available with the government can be used to contain domestic food prices.
    • An extension can be provided to the Prime Minister Garib Kalyan Yojana (PMGKY),which was designed to provide foodgrain to beneficiaries.
    • The scheme can be extended further until the Indian economy fully recovers and food inflation ceases to be a worry.
  • Expansionary fiscal policy: the task of increasing incomes and aggregate demand would also require the government to continue with an expansionary fiscal policy.
    • It implies widening India’s social protection net.
  • The inflationary trends happen to be strengthening at a time when the economy of the country is struggling with deficient demand also implies that any attempt to contain inflation through the use of deflationary policies could threaten a nascent economic recovery by further compressing aggregate demand.


POSTED ON 03-03-2022 BY ADMIN
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