GS Paper III

News excerpt

As per RBI’s monthly bulletin, the growth may get affected if inflation is not brought back to the 4% target.

More details on news:

• Headline inflation, as measured by year-on-year changes in the all-India CPI, increased to 5.6 % in November 2023 from 4.9% in October.  In September, CPI print was at 5.02%.
• While CPI -based inflation for FY24 is expected to be at 5.4%, for the first three quarters of 2024-25 it is projected at 4.6%, according to the ‘State of the Economy’ article published in the RBI’s December bulletin.
• However, the RBI said that it is focused on achieving the 4% inflation target. Due to concerns over higher inflation amid uncertain food prices, the RBI kept the repo rate unchanged at 6.5 % for the fifth time in a row.

Causes of rise in inflation in recent time

• Inflation in India is primarily influenced by factors related to supply but there are times when demand factors also play a significant role, according to an article published by the Reserve Bank of India as a part of their December bulletin.
• During the two waves of COVID-19, supply disruptions were the main cause of inflation. However, following the Russia-Ukraine conflict, the driving forces shifted predominantly to factors related to demand.
• The start of the pandemic, lockdowns caused a major decline in production and demand, leading to a steep drop in economic growth. This phase also saw a decrease in commodity prices due to weakened demand.
• However, as the economy began to reopen with distribution of vaccines and release of pent-up demand, demand recovered more rapidly than supply. This imbalance resulted in rising pressures on commodity prices.
• The onset of the Russia-Ukraine conflict in 2022 further intensified supply chain challenges and added to commodity price pressures.

• Analysis of data from January 2019 to May 2023 suggests that categories such as vegetables, oils and fats, milk, eggs, pulses, and sugar frequently experience supply-side constraints.
• In contrast, items like non-alcoholic beverages, personal care products, and health-related goods are mainly affected by demand-side factors.

Steps taken to curb Inflation:

• Onion export: Recently, the curbs on onion export were extended in the form of a total ban until March 31, 2024.  
• Grain release: The government released grain from its godams to restrain prices from spiralling out of control and to offer subsidized food items to impoverished households.
• Repo rate unchanged: The RBI kept the repo rate unchanged at 6.5 % for the fifth time in a row as it maintains a tight vigil on inflation.
• Price Stabilization Fund (PSF): It was established in 2014-15 under the ministry of agriculture to help regulate the price volatility of important agri and horticultural commodities like onion, potatoes and pulses were also added subsequently.

Way forward:

• Spend money on long-term investments: Long-term investments have the potential to fetch inflation-beating returns. Some long-term investment options are real estate, mutual funds, gold investments, stocks, etc.
• Invest in commodities: Commodities such as oil, gold, and other precious metals have an inherent worth that is often resilient to the effects of inflation.
• Check on hoarding: The Government and banks must keep a check on hoarding and black marketing.
• Minimization of unnecessary expenditure: In order to control inflation, the government should cut back on needless spending on non-development initiatives. 

Prelims PYQ

Q. Which reference to inflation in India, which of the following statements is correct? (UPSC 2015)

(a)    Controlling the inflation in India is the responsibility of the Government of India only

(b)    The Reserve Bank of India has no role in controlling the inflation

(c)     Decreased money circulation helps in controlling the inflation

(d)    Increased money circulation helps in controlling the inflation

Mains PYQ

Q. Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (UPSC 2019)