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08 May 2024 – The Indian Express


Inflation-related issues in India

  • The increase in the cost of most everyday or commonplace goods and services, including food, clothing, housing, entertainment, transportation, and consumer essentials, is referred to as inflation.
  • The average price shift over time in a basket of goods and services is called inflation.
  • Deflation is the opposite and uncommon decline in this basket of goods’ price index.
  • The decline in the buying power of a unit of a nation’s currency is known as inflation.
  • By using its instruments to manage the amount of money in the market, the RBI’s Monetary Policy Committee (MPC) manages inflation.
  • A central government body that oversees the implementation of policies to maintain the economy’s stability measures inflation.
  • Inflation is monitored by the Ministry of Statistics and Programme Implementation.
  • There are two primary indicators used to quantify inflation:
  • The Consumer Price Index (CPI) and the Wholesale Price Index (WPI) track changes in prices at the retail and wholesale levels, respectively.

Different forms of inflation:

  • Demand Pull Inflation: When total demand exceeds total supply in the economy, demand pull inflation occurs.
  • Cost push inflation is the process through which rising production costs are brought about by a decline in the overall supply of products and services.

Reasons behind inflation

Does corporate pricing power contribute to India’s inflation?

  • Following the 2008 global financial crisis, inflation in India skyrocketed, surpassing levels in the epicentre (the United States and the United Kingdom).
  • This resulted from negative agricultural shocks and sharp increases in procurement costs, which caused a spike in food price inflation in India.
  • It would be premature to argue that corporate pricing power is the reason Indian inflation is greater than in the West today because food price increases tends to feed into core inflation.

February’s wholesale price (WP):

  • The inflation rate for food prices was 8.8%.
  • The largest commodity group in the index, manufactured goods, saw a 2% decline (Ministry of Commerce).
  • Even if core inflation has decreased in the West, it is not justified to claim that it should have done so in India given the ongoing increase of food prices.
  • There is proof that the increase of food prices influences core inflation.
  • Elevated core inflation is caused by corporate power:
  • Consumer price (CP) inflation has not decreased in the six months leading up to March 2023, whereas wholesale price inflation has (National Statistical Office).
  • WP inflation increased by 12 percentage points in 2021–2022, but CP inflation decreased (Reserve Bank of India, 2022).
  • One compensatory technique is for retail companies to continue raising prices even after wholesale price inflation has decreased in 2022–2023.
  • There is a lag in the retail sector’s rising input costs being passed on.
  • ascribes higher core inflation to consumer price increases while wholesale prices decline
  • The Big 5’s pricing power is predicated on the idea that these corporations are heavily involved in retail sales.
  • They might not be as prevalent in the economy as a whole.
  • They make up 12% of sales in the non-financial sector.
  • It is an admission of inconsistency to compare headline or core WP inflation with CP inflation.
  • The CP-corresponding commodity basket consists of things like housing, health, education, leisure, and personal care.
  • Consequently, they are excluded from the wholesale price index.
  • Quarters one through three of the fiscal year:
  • In each of them, industries where the Big 5 are unlikely to have a significant presence account for more than 75% of the direct inflationary contributions.
  • In most historical times, food goods alone account for close to 50% of the total.
  • India’s present inflation is being driven by the rising cost of food.

The Way Ahead:

  • Theoretically, corporates could be the cause of inflation if their concentration keeps growing and they start to control the economy—in this case, retail trade.
  • Less than 25% of the consumer price index is made up of the industries where the Big 5 are most prevalent.
  • In India, industrial concentration is increasing, and the ramifications are more important than the cost.
  • Although India’s public policy has a history of being aware of industrial concentration, it may only be now beginning to recognise the ramifications of concentration in the services, such as in telecommunications, and in infrastructure, such as in ports.
  • Countervailing power: India should take precautions as a democracy to prevent any entity pursuing a private interest—whether social or economic—from using countervailing power, regardless of the implications for inflation.
  • Limiting the discussion of inflation by framing it in terms of core inflation, such as when the topic of corporate pricing power was raised.
  • Food and fuel price inflation is excluded from core inflation since it is a cyclical phenomenon that does not necessitate policy intervention.
  • The true price of food, or its cost in relation to the overall level of prices, has increased significantly since 1991 due to all of the Reforms.
  • Measuring inflation without taking food prices into account is ignoring the factors that the general people, not central bankers, finds most important.
  • At the moment, India’s only option for containing inflation is to use interest rates to reduce overall demand.
  • It neatly relieves the legislator of the burden of guaranteeing food production at reasonable costs.
  • It’s possible that the recent intervention that was made to explain India’s core inflation had positive effects after all.

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