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CHAPTER-5 PRICES AND INFLATION: SUCCESSFUL TIGHT-ROPE WALKING

CHAPTER-5 PRICES AND INFLATION: SUCCESSFUL TIGHT-ROPE WALKING

    • Policymakers are constantly concerned about rising costs because they primarily affect the average person.
    • Inflation's dangers are felt more acutely in developing economies, where essentials comprise a larger portion of the consumption basket than in wealthy nations.
  • India's inflation rate has been calm in recent years, mildly under the RBI goal range of 4% from 2017 to 2019.
    • The RBI's upper tolerance level of 6 per cent for inflation was exceeded in 2020 due to supply-side disturbances.
    • Through supply-chain interruptions for necessities like food, medicine, and industrial items, the pandemic caused a greater shock to the supply than it did to the demand.
    • This, in turn, made the country's cost-push inflation worse.
    • As the pandemic receded, the Russia-Ukraine conflict erupted, sparking global inflation mostly driven by rising crude oil and other commodity prices.
    • Prices rose to a decade-high level, eating into household budgets and forcing central banks to tighten monetary policy.
    • Unprecedented inflation rates were left to confront a recovering global economy.
    • Stagflation was looming large on the horizon.
    • The only choice for industrialized economies to respond to was to hike interest rates.
    • The US currency strengthened as the US Federal Reserve increased interest rates, increasing the cost of petroleum imports priced in US dollars.
    • The International Monetary Fund (IMF) expects the inflation rate in advanced economies to reach 7.2 percent in 2022, the highest level since 1982, up from 3.1 percent in 2021.
  • In September 2022, the rate in the Eurozone hit 10%. (WEO, October 20221 ).
  • While the UK experienced an annual price increase of 9.2 percent in December 2022, US inflation hit its 40-year high of 9.1 percent in June 2022 before slowing to 6.5 percent in December 2022.
  • In December 2022, there was 8.6 percent inflation in Germany.
  • From August through November 2022, Turkey's inflation rate was above 80%, which marginally decreased to 64.3% in December 2022.
  • The war exacerbated the impacts of the pandemic's robust recovery in consumer demand for goods and services.
  • By 2022, the inflation rate in emerging markets and developing economies (EMDEs) is expected to rise from 5.9 percent in 2021 to 9.9 percent (WEO, October 2022).

 Record consumer price inflation in the 2022 calendar year

  • The sensible and well-calibrated fiscal and monetary policies used to combat the pandemic's economic effects lay the framework for India's remarkable inflation management previously.
  • India opted not to overstimulate, allowing for the containment of price pressures brought on by the crisis between Russia and Ukraine.
  • The country's excessive summer heat and subsequent unequal rainfall in some areas impacted the farm industry, which reduced supplies and raised the price of some key goods.
  • India's inflation rate peaked in April 2022 at 7.8 percent before moderating to 5.7 percent in December 2022 on the back of good monsoons and prompt government measures that ensured adequate food supply. 
  • Commodity prices fell due to the global economic recession and an increase in interest rates, which also helped significantly lower wholesale price inflation.
  • Pressures on input prices for Indian industries decreased as a result.
Core inflation- It reflects the shift in prices for goods and services but excludes the food and energy industries. These items aren't included in the inflation metric since their costs fluctuate a lot more.

              Core inflation=headline inflation- food and fuel inflation

Headline inflation- A country's overall inflation rate is known as headline inflation. The headline inflation rate accounts for inflation across a variety of goods, such as energy and food commodities. It differs from core inflation, which computes inflation without accounting for the cost of food and energy. 

Domestic retail inflation-

    • In comparison to FY21, CPI-Combined (CPI-C) based retail inflation was lower in FY22.
    • A few sub-groups, including "oils & fats," "fuel & light," and "transport & communication," experienced considerable inflation during FY22. There are two reasons behind this-Supply disruptions caused by the pandemic and headline inflation caused by the Russia Ukraine crisis. 
  • While core inflation remained at a low level in FY23, rising food inflation was primarily responsible for greater retail inflation.
  • Food inflation ranged between 4.2 percent to 8.6 percent, between April and December 2022, while the core inflation rate stayed at around 6 percent except in April 2022."

Retail inflation driven by food commodities-

    • The housing, textiles, pharmaceutical, agriculture and related, and retail industries are mostly to blame for retail price inflation.
    • The main drivers of headline inflation in FY23 were "food & beverages," "clothing & footwear," and "fuel & light," with the first two contributing more this fiscal year than last.
  • Food Inflation Caused by Vegetables and Cereals in FY23:-
    • Based on the Consumer Food Price Index (CFPI), food inflation climbed to 7.0 percent in FY23 from 3.8 percent in FY22. 
    • The government has banned the export of wheat goods under HS Code 1101 and slapped an export fee on rice to rein in the skyrocketing costs of wheat and rice. 

Pradhan Mantri Gareeb Kalyan ann yojana-

  • Due to a shortage in worldwide supply and an increase in export taxes imposed by several nations, the price of edible oils increased dramatically on the international market in FY22.
  • India imports 60 per cent of the edible oils it needs, making it susceptible to changes in global prices. India imports 60 per cent of the edible oils it needs, making it susceptible to changes in global prices.

Some initiatives to combat food inflation- 

  • The Central Government made the decision to offer States and UTs 1.5 million tonnes of Chana at a reduced price for distribution under various social programs. The states would be able to buy Chana for $8 less per kg than their individual issue rates.
  • Leading Edible Oil Associations were ordered by the Central Government to ensure that the maximum retail price of edible oils was reduced by '15 per litre with immediate effect.
  • Rural-Urban Inflation Differential has Declined:- 
    • The current fiscal year has seen rural inflation remain higher than urban inflation, reversing the trend from the epidemic years.
  • Rural inflation is generally higher than urban inflation in most states and UTs:
    •  In most states, CPI-C inflation rose in FY23 compared to FY22.

Domestic wholesale price inflation-

  • Wholesale Price Inflation Caused by Global Supply Chain Disruption: - WPI-based inflation remained low during the Covid-19 period, and it started to gain momentum in the post-pandemic period as economic activities resumed. 
  • Part of the double-digit inflation in WPI during FY23 could be attributed to food inflation, which stayed at 7.5 percent against 6.8 percent in FY22. Due to the unpredictable weather, cereals and vegetables were the main causes of food inflation. Inflation in the ‘manufactured products’ subgroup in FY23 saw a considerable decline compared to the previous year due to the rationalization of duties on critical inputs and moderation in global commodity prices.
  • Core inflation in FY23 remained lower than it was in FY22.
  • The high import dependence on edible oil has meant that the transitory effect of rising international prices of these products is also reflected in domestic prices.

Measures to Contain Inflation in Input prices- 

  • Fuel Prices: The Central Government has intervened by adjusting the excise taxes on gasoline and diesel  
  • Plastic products: The import duty on the import of raw materials used in the plastic industry has been reduced to lower the cost of domestic manufacturing.
  • Steel:  Import duty on major inputs – ferronickel, cooking coal, PCI coal – has been cut from 2.5 percent to zero, while the duty on coke and semi-coke has been slashed from 5 percent to zero.  
  • Cotton: The government waived customs duty on cotton imports until 30 September 2022, to benefit the textile industry and lower prices for consumers.  
  • Diamonds and gemstones: customs duty on cut and polished diamonds and gemstones were reduced to 5 percent and duty on the simply sawn diamond was reduced to nil.  
  • Chemical products: Customs duty on certain critical chemicals namely methanol, acetic acid, and heavy feedstocks for petroleum refining were reduced in the Budget 2022-23.

Fuel price inflation: declining global crude oil prices  - 

  • In FY22 and FY23, inflation in WPI ‘fuel and power’ was mostly driven by high international crude oil prices. 
  • The price of the Indian basket of crude oil during FY21 hovered in the range of US$20-65/bbl in response to the muted global demand brought on by Covid-19-induced constraints.
  • Following that, prices began to soar as a result of the Organization of the Petroleum Exporting Countries (OPEC) and other oil-producing nations' extraordinary cuts to the supply of crude oil.
  • Additionally, a decrease in the central excise duty on gasoline and diesel in November 2021 and May 2022, along with a subsequent decrease in the value-added tax (VAT) levied by the State Governments, moderated the retail selling price of gasoline and diesel in India.

Convergence of WPI and CPI inflation-

  • The convergence between the WPI and CPI indices was mainly driven by two factors.-
    • Firstly, a cooling in inflation of commodities such as crude oil, iron, aluminum, and cotton led to a lower WPI.
    • Second, a rise in the cost of goods and services contributed to CPI inflation. Although they are not part of the WPI basket, services are a major component of the CPI-C. 

Falling of  Inflationary expectations-

  • Businesses and household inflation expectations too have moderated.

Monetary policy measures for price stability- 

    • Reserve Bank of India’s Monetary Policy Committee (MPC) increased the policy repo rate under the liquidity adjustment facility (LAF) by 2.25 percent (225 basis points) from 4.0 percent to 6.25 percent between May and December 2022. 
  • How is the Current Inflation Different from the 1970s? 
    • Recent oil price rises are proportionally smaller. Commodity supply disruptions have played a smaller role in recent price increases, and central banks have much clearer and more robust institutional frameworks that focus on price stability today.However, the Bretton Woods controlled exchange rate regime collapsed in 1973 immediately after the crisis because many nations' definitions of monetary policy's objectives and even its tools were vague. 

Housing prices: recovering housing sector after the pandemic-

  • In order to achieve the goals of price stability, financial stability, and growth, housing prices must be closely monitored.

With FY18 serving as the base year, the National Housing Bank (NHB) releases two Housing Price Indices (HPI), referred to as "HPI evaluation price" and "HPI market price quarterly." Out of the 50 cities, 43 experienced an increase in the index, while 7 saw a fall. Metros city also showed improvement.

Pharmaceutical sector-

  • National List of Essential Medicines (NLEM), 2015 NLEM 2022 was promulgated by the Ministry of Health and Family Welfare on September 2022 and and revised Schedule I of Drugs (Prices Control) Order (DPCO) was notified on 11 November 2022 by Department of Pharmaceuticals incorporating NLEM, 2022.
  • Pradhan Mantri Bhartiya Janaushadhi Pariyojana (PMBJP) was launched to provide everyone with access to high-quality generic medications at reasonable costs. 

Conclusion-

  • The CPI-C and WPI have both dropped below 6%.
  • The main cause of inflation in this fiscal year, international crude oil prices, have stabilized.
  • Similar to what happened during the epidemic, supply chain difficulties could result from the resurgence of Covid-19 in China.
  • Our imported inflation may be particularly impacted by the geopolitics surrounding energy.
  • Due to supply limitations, the RBI predicts that domestic prices for spices and grains would increase in the near future. Due to supply limitations, the RBI predicts that domestic prices for spices and grains would increase in the near future.
  • The monetary and fiscal authorities should continue to be as attentive and watchful as they have been this year in the coming year.

 

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