Managing the inflation of food and drink in India
GS 3 Indian Economy & Related Issues
- India must focus on cereal and milk inflation, both of which have significant CPI weights.
About the Inflation
Responsibility & objective
- In India, the Reserve Bank of India (RBI) is charged with formulating monetary policy with the primary objective of maintaining price stability while bearing in mind the growth objective.
Maintaining the inflation level
- The target retail inflation rate for the central bank is 4%, but the RBI has the discretion to allow inflation to rise to 6% or decline to 2% in any given month.Some inflation is desirable because it stimulates the economy.
Relation of growth & inflation
- When an economy experiences rapid economic development — that is, when there is a great deal of demand in the economy — prices typically increase.
Drivers of Inflation:
- Price increases caused by the disparity between demand (which is higher) and supply (which is lower).
- Higher prices for products and services due to a rise in the cost of production.
- Foreign market exposure is determined by the dollar’s value. Changes in the exchange rate have an effect on the inflation rate.
- High demand and low production or supply of multiple commodities create a demand-supply gap, which results in a price increase.
How is Inflation measured?
- In India, inflation is measured predominantly by the WPI (Wholesale Price Index) and the CPI (Consumer Price Index), which respectively measure wholesale and retail price changes.
What are WPI and CPI inflation rates?
Consumer Price Index (CPI)
- It is an index that measures retail inflation in the economy by measuring the change in prices of the most commonly purchased products and services.
- The CPI, also known as a market basket, is calculated using a fixed list of goods and services, including food, shelter, clothing, transportation, electronics, medical care, and education, among others.
- The CPI base Year is 2012.
The Wholesale Price Index(WPI)
- As of April 2017, the revised series of Wholesale Price Index (WPI) with base 2011-12 is in effect.
- The WPI measures the average change in wholesale prices and is predominantly employed as a GDP deflator.
- The WPI(2011-12) only accounts for fundamental prices and excludes taxes, rebates/trade discounts, transportation, and other fees.
- The Department of Promotion of Industry and Internal Trade (or DPIIT) compiles inflation data derived from the WPI.
Issues & Challenges with food and beverages component in the Indian CPI:
Management of food and beverages component
- The food and beverage component of the Indian CPI has the highest weighting among G20 nations, at 45.86 percent.
- Managing this component to approximately 4 percent is essential for containing inflation overall.
- Surprisingly, this component of inflation cannot be controlled solely by monetary policy or even fiscal policy.
Triggered by external shocks
- The simple reason is that it is often triggered by external shocks, such as droughts and collapse of supply chains — for instance, during the Covid pandemic and the Russia-Ukraine conflict.
Affected by changes in the weather
- The brewing El Nino is a looming threat, and it is anticipated that it could lead to below-average precipitation or even a drought.In the event that monsoon precipitation falls below average, it may be prudent to consider how to keep food inflation below 4 percent.
Protection for Rice & wheat crops
- Rice is the most abundant commodity during the kharif season. The non-PDS rice inflation rate for April was 11.4%.
- Wheat inflation, the most significant rabi crop, remains extremely high at 15.5%.
- The PM-Garib Kalyan Yojana provides free rice and/or wheat (5kg/person/month) to over 800 million persons.Therefore, they are protected against maize and wheat inflation.
- Food Corporation of India (FCI) rice inventories are more than three times the buffer stock requirements for rice.
- If the government desires to tame rice price inflation, it can unload 5 million tonnes (MT) of rice from the Central Pool through open market operations and readily reduce rice price inflation to approximately 4%.
- The wheat procurement (approaching 26MT) has been adequate (approaching 26MT) to satisfy the requirements of the public distribution system (PDS) — approximately 22 MT — and leave room for open market operations.
- The aggregate cereal and product inflation rate of 13.7% is still extremely unsettling.
- To control cereal inflation, we must be more proactive with our buffer stocking policy. This would be significantly more effective than any monetary policy tool.However, concerns exist regarding milk and milk products.
- India is presently experiencing milk price inflation due to a shortage of milk fat, which has prompted dairies to increase full-cream milk prices or reduce fat content by rebranding existing products.
- Even branded ghee and butter have been reported missing from store shelves.
|RBI’s Monetary tool to tackle with the inflation
• When inflation is high, the Reserve Bank of India raises the repo rate, which is the interest rate it charges banks for lending them money.
· This encourages reserves and discourages spending, thereby decreasing total demand and GDP.
· This, in turn, reduces the inflation rate.
• During periods of sluggish economic activity, the RBI reduces the repo rate to stimulate demand and economic output.All of these crucial decisions regarding the repo rate are made by the Monetary Policy Committee, which meets every two months to assess inflation and growth prospects.
Headline, core & retail inflation
· Headline inflation refers to the change in value of all products in the basket.
· Developing economies are more susceptible to headline inflation than developed economies.
Daily Mains Question
[Q] It is crucial to tame India’s overall inflation that food and beverage inflation be kept to around 4 percent. Discuss. Examine the effect of external disruptions on the Consumer Price Index (CPI) in India.