Corporate Power and Indian Inflation
Context:
- A novel theory has been put out that has ramifications for the management of inflation and explains the recent trajectory of inflation in India. According to reports, Viral Acharya, a former deputy governor of the Reserve Bank of India, remarked that core inflation in India continues to be high, in contrast to the West where it decreased with COVID-19. He attributes this to the pricing power of the “Big 5” large corporations. The story has gotten a lot of attention in the financial press.
- Reliance Group, Tata Group, Aditya Birla Group, Adani Group, and Bharti Telecom are the “Big 5,” according to Viral Acharya.
‘Core inflation’ defined:
- Core inflation, which excludes costs from the food and energy sectors, is the change in prices for products and services. These things aren’t included because their costs are so much more erratic.
- The consumer price index (CPI), a gauge of prices for goods and services, is most frequently used to compute it.
The cause of rising food prices:
Why corporate pricing power is currently fueling India’s inflation:
- There is a difference in India’s inflation rate from that of the rest of the world: Following the global financial crisis of 2008, India experienced a sharp rise in food prices as a result of adverse agricultural shocks and significant increases in purchase prices.
- As highlighted by corporate power, elevated core inflation is based on observations from a relatively brief time period: While wholesale price inflation (WPI) has decreased significantly in recent years (2023), consumer price inflation (CPI) has not.
- The Big 5 companies have a strong presence in the retail sector: This is seen when blaming the Big 5’s pricing power for the excessive core inflation in consumer prices when wholesale prices decline.
- There is a discrepancy when comparing headline or core CP inflation to WP inflation: Housing, health, education, leisure, and personal care are all included in the commodity basket that corresponds to CP but are obviously excluded from the wholesale price index.
- Data from the first three quarters of the most recent fiscal year casts doubt on the assertion that corporate pricing power is the primary cause of India’s current inflation. In each of these time periods, over 75% of the direct inflationary contributions came from industries where the Big 5 are unlikely to be heavily represented, with food products alone accounting for close to 50% of all time periods.
Pricing power exists:
- It is obvious that India’s present inflation is being caused by the rising cost of food. None of this is intended to imply that there is no corporate pricing power or that it is irrelevant to inflation. Beyond its evident function in raising the price level, the question is to what extent corporate power is today driving overall inflation in India.
- Food and fuel price inflation are excluded from core inflation on the grounds that they frequently vary, balancing out fluctuations, and don’t necessitate a governmental response. However, given the economic situation in India, this presumption is incorrect.
The current method of reducing inflation:
- In India, the cost of food has only gone up, and their current inflation rate has been exceedingly high. The real price of food, or its price in relation to the overall level of prices, has increased significantly since 1991, despite all the “reforms.” Therefore, excluding what matters most to the population, as opposed to central bankers, when measuring inflation would be to do so without taking food prices into account.
- India’s only currently available method of reducing inflation is to reduce aggregate demand by raising the interest rate. It relieves the decision-maker of the burden of ensuring the production of food at competitive rates.
Conclusion:
- The effect of monetary policy in reducing inflation caused by food (and fuel) is limited. Instead, we must make sure that the nation has an appropriate supply of such necessities.
