Editorial 1: Price relief
Context:
- Context: Recently the Consumer Price Index (CPI) inflation declined to an 18-month low of 4.7%.
Causes of recent fall in inflation:
- Fall in the prices of vegetables, oils and fats, meat and fish
- A decent Rabi harvest despite unseasonal rains
- Enough procurement by the government to curb any inflationary pressures
- Status quo in policy repo rate at 6.5% by the Monetary Policy Committee (MPC) indicating a ‘accomodative’ stance
Points of Concern:
- Elevated prices of cereals, milk, clothing and footwear, etc.
- Lurking threat of upcoming El-Nino this year
Basic information:
Inflation
- Inflation refers to the sustained rise in the general level of prices of goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.
- Inflation measures the average price change in a basket of commodities and services over a year.
- Inflation is indicative of the fall in the purchasing power of a unit of a country’s currency. This could ultimately lead to a deceleration in economic growth.
- However, a moderate level of inflation is required in the economy to ensure that production is promoted.
- National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation measures inflation.
- In India, inflation is primarily measured by two main indices — WPI (Wholesale Price Index) and CPI (Consumer Price Index) which measure wholesale and retail-level price changes, respectively.
Inflation Types
Retail inflation is the rate of increase in the prices of goods and services that households purchase for their daily consumption.
- Retail inflation, specifically, is measured in Consumer Price Index (CPI), which is a weighted average of prices of a basket of consumer goods and services. Therefore, retail inflation is also termed CPI-based inflation.
- The Ministry of Statistics and Programme Implementation (MoSPI) is responsible for compiling this data, which is measured by the rate of change in CPI over a period of time.
- The CPI basket of goods and services includes food and beverages (45.8%), Housing (10%), Fuel and Light (6.8%), Clothing and Footwear (6.5%), Miscellaneous (27.2%) etc.
- While in CPI-C (Consumer Price Index-Combined), major fuel items such as ‘petrol for vehicle’ and ‘diesel for vehicle’, which have relatively large weights, are not included in ‘fuel and light’. These fuel items are included in ‘transport and communication’, a subgroup under the miscellaneous group.
- Base year is 2012.
The Wholesale Inflation is a measure of inflation based on the price of a basket of wholesale goods, in a financial year.
- WPI basket of goods covers three groups: Manufactured Products (64%), Primary Articles (22.6%), Fuel and Power (13.2%), with different weights.
- The WPI index tracks the changes in supply and demand in various sectors of the economy.
- The Office of the Economic Adviser in the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry is responsible for compiling WPI and releasing it.
- Base year is 2011-12.
Core Inflation: Core inflation is the change in the costs of goods and services, but it does not include those from the food and energy sectors. This measure of inflation excludes these items because their prices are much more volatile. Traditionally, “core inflation” is calculated by excluding ‘food and beverages’ and ‘fuel and light’ groups from overall inflation.
Refined Core Inflation excludes main fuel items like ‘petrol for vehicle’, ‘diesel for vehicle’ and ‘lubricants’ and other fuels for vehicles, in addition to ‘food and beverages’ and ‘fuel and light’ from the headline retail inflation.
Headline Inflation is the measure of total inflation in an economy. It includes price rise in food, fuel and all other commodities. Headline inflation is the raw inflation figure reported through the Consumer Price Index (CPI).
The Monetary Policy Committee (MPC) is responsible for fixing the benchmark interest rate in India.
- The Reserve Bank of India Act, 1934, was amended by Finance Act (India), 2016, to constitute MPC which will bring more transparency and accountability in fixing India's monetary policy.
- The meetings of the Monetary Policy Committee are held at least four times a year (specifically, at least once a quarter) and it publishes its decisions after each such meeting.
- The committee comprises six members - three officials of the Reserve Bank of India and three external members nominated by the government of India.
- The governor of the Reserve Bank of India is the chairperson ex officio of the committee.
- Decisions are taken by majority with the governor having the casting vote in case of a tie.
- The current mandate of the committee is to maintain 4% annual inflation until 31 March 2026 with an upper tolerance of 6% and a lower tolerance of 2%.
- The committee is answerable to the government of India if the inflation exceeds the range prescribed for three consecutive quarters.
Editorial 2: Weather-proofing food security
Context:
- Recently, Union Agriculture minister called for close co-operation between SCO members to maintain food supply chain to ensure food as well as nutritional security. India has also recently called for finding a permanent solution to the issue of public stockholding for food security in upcoming WTO meet in 2024. However, recent domestic inflation has been higher in food category impacting food security.
Key factors behind domestic food inflation:
RBI and Government of India (GoI) work in tandem to achieve the twin objective of managing inflation at 4%+-2% with high growth of 7%.
- The food and beverages component in the Indian CPI has a weightage of 45.86 per cent, the highest amongst G20 countries. Managing this component to around 4 per cent is critical to taming overall inflation.
- It cannot just be managed only through monetary policy, nor even by fiscal policy.
- The simple reason is that it is often triggered by external shocks, such as droughts and breakdown of supply chains — for instance, during the Covid pandemic and the Russia-Ukraine conflict.
- The upcoming El Nino may cause below normal rainfall, even a drought.
- Remember that all droughts since 1947 have been El Nino years, but all El Nino years are not necessarily drought years.
- There is also often a tug of war between the El Nino and Indian Ocean Dipole.
- Cereal Inflation: The biggest crop of the kharif season is rice. And rice inflation (non-PDS) for April was 11.4 per cent. Wheat inflation — that of the most important rabi crop — is still very high at 15.5 per cent.
- The overall cereal and products inflation is still at a very uncomfortable level, 13.7 per cent.
- Milk and milk product inflation at 8.85% was another concern and it contributed to almost 12% of Consumer Price Index (CPI). Two key reasons include
- One, the lumpy skin disease took its toll and as a result, the milk production growth rate collapsed to almost zero in FY23 from a normal growth rate of 5 to 6 per cent it achieves in a normal year.
- Second, the fodder price inflation has been very high, between 20 and 30 per cent, in recent months.
Steps Taken and Way Forward:
- PM-Garib Kalyan Yojana is providing more than 800 million people with free rice and/or wheat (5kg/person/month). So, they are well protected from cereal inflation.
- The rice stocks with the Food Corporation of India (FCI) are more than three times the buffer stock norms for rice.
- The wheat procurement has been sufficiently good (touching 26MT) to meet the requirements of the public distribution system (PDS) — around 22 MT.
- Improved budget allocation for agriculture and allied sectors in India by more than 5 times in 10 years from 2013-14.
- Good performance in the agriculture sector, contributing to global food security with food grain production, registering a significant growth in exports, and exports of agricultural and allied products have crossed Rs 4 lakh crore.
- Use of Technology:
- The AI for Agriculture Innovation initiative is transforming the agriculture sector in India by promoting the use of artificial intelligence and other technologies.
- Biotech-KISAN : It is a scientist-farmer partnership initiative for agriculture innovation that was started in 2017 to connect science laboratories with farmers to identify creative ideas and technologies to be utilised at the farm level.
- National Mission on Sustainable Agriculture (NMSA): It is a part of the National Action Plan on Climate Change (NAPCC) in India. It includes initiatives like Soil Health Card, Paramparagat Krishi Vikas Yojana, Mission Organic Value Chain Development, Rainfed Area Development, National Bamboo Mission, and Agro-Forestry.
- Micro Irrigation Fund is established under NABARD, and it will provide money from the fund to the states at a reduced interest rate in order to encourage micro-irrigation practices, which now cover just 10 million hectares of land out of a gigantic potential of 70 million hectares.
Way Forward
- To tame rice and wheat price inflation, open market operations can be conducted to lower the market prices.
- FCI can unload 5 million tonnes (MT) of rice from the Central Pool in open market operations, and easily bring down the rice inflation to around 4 per cent.
- To tame Milk Inflation, need is to lower import duties on fat, which are currently at 40 per cent and skimmed milk powder (SMP), which is at 60 per cent.
- Indian prices of SMP and fat (butter) are much higher than the global prices, and therefore, by reducing import duties to say 10 to 15 per cent, there would be some imports of fat and SMP.