Editorial 1: The price pinch: Despite RBI’s best intentions, inflation continues to hurt
Recent Context:
- Controlling the inflation withing the targeted limit is major concern of the Indian economy’s recovery from the pandemic and subsequent global disruptions.
- After softening for three consecutive months, it spiked again in January. The RBI has been playing the part of an inflation targeting central bank over the last few months, raising interest rates in an attempt to rein in inflation. However, the fight to bring down inflation is clearly far from over.
- The latest inflation data also raises the question if the RBI is doing enough.
Targeted inflation bandwidth and its position
- The inflation targeting framework mandates the RBI to achieve a CPI (consumer price index) inflation target of 4 per cent.
- During the pandemic period of March 2020 to September 2021, CPI inflation averaged 5.9 per cent.
- This was higher than the point target of 4 per cent but still within the inflation targeting band of 2-6 per cent. Since then, however, the inflation outlook has been worsening
- In 2022, CPI inflation was above the upper threshold of the RBI’s targeting band for 10 consecutive months, which meant the target was not achieved for three quarters in a row.
- Inflation began softening towards the later part of the year. By December 2022, CPI inflation was down to 5.7 per cent.
- This led many to believe that the inflation peak had passed, and that inflation was on its way to the official target.
- The softening of inflation in November and December 2022 was largely driven by a steep fall in vegetable prices. Excluding vegetables, CPI inflation was in fact more than 7 per cent.
- The misplaced optimism has now become evident. The January 2023 CPI inflation came out to be 6.5 per cent, once again crossing the upper threshold of the RBI’s inflation targeting band.
The major reasons behind the rise in Inflation above the targeted limits:
- First, with food accounting for 46 per cent of the overall CPI basket, a rise in food inflation from roughly 4 per cent in December 2022 to almost 6 per cent in January 2023 has played an important role in overall inflation going up.
- Within food, one component that has proved rather stubborn is cereal inflation. Between May and December 2022, year-on-year cereal inflation nearly doubled from 5 per cent to 14 per cent.
- In January 2023, this increased to 16 per cent. Within cereals, inflation in wheat has been steadily going up. Between May and December 2022, wheat inflation increased from 9 per cent to 22 per cent. It increased even further to 25 per cent in January 2023.
- The steep rise in wheat prices reflects shortages. Data from the Food Corporation of India shows that stocks in government warehouses declined from 33 million tonnes in January 2022 to 17 million tonnes in January 2023. The government has recently approved a release of three million tonnes in the open market.
- Second, increase in core (non-food, non-fuel) inflation which came out to be 6.2 percent in January.
- This is consistent with the unyielding core inflation of 6 per cent for nearly three years now. A persistently high core inflation implies that price pressures have become entrenched in the system.
- Part of this can be explained by the continued pass-through of high input prices to final goods prices.
- Interestingly, this is happening even when WPI (wholesale price index) inflation, which reflects input prices, has come down from a high of 16 per cent in May 2022 to less than 5 per cent in January 2023.
- This implies that with margins getting squeezed and profitability suffering, firms are spreading out the pass-through over a longer time period. This makes the core inflation trajectory uncertain.
- Finally, external factors also play a role. Inflation in developed countries continues to be high (6.4 per cent in the US; 8.5 per cent in the EU; 10.5 per cent in the UK).
- India is importing some of this elevated inflation through international trade in goods and services.
- Moreover, with China gradually opening up its economy after nearly three years of zero-Covid restrictions, commodity prices are likely to go up, which could exert renewed pressures on India’s inflation.
What have the policymakers been doing to address the inflationary concerns? (Fiscal and Monetary Policy)
- The government has done its bit by announcing a conservative Union budget for 2023-24.
- It has accorded primacy to much needed fiscal consolidation, and has refrained from announcing populist measures that could have arguably fuelled demand, and hence inflation.
- The RBI has been doing its job as well. It increased the policy repo rate from a pandemic low of 4 per cent to 6.5 per cent in a span of 10 months.
- It has also adopted a hawkish tone, as evident from its latest monetary policy statement. Unlike last year, when despite rising inflation, the monetary policy statements did not contain any forward guidance, the RBI, in its February 2023 statement, emphasised the importance to “remain alert on inflation”, thereby hinting that the monetary tightening cycle is continued in order to control inflation.
Way forward:
- Having missed the inflation target for three consecutive quarters in 2022, the RBI had to submit a report to the government describing a plan of action that would help bring inflation down.
- The law does not require either the RBI or the government to disclose the contents of this report. However, given that inflation is proving to be difficult to rein in, and that the 4 per cent target is not likely to be achieved next year either, releasing the report to especially highlight the remedial actions that the RBI plans to undertake might help stabilise inflation expectations, and facilitate the central bank’s own endeavour to fight inflation.
- A credible glide path to bring inflation down to the target level is of critical importance as it hurts the poor the most by reducing their purchasing power.
Editorial 2: Flying high into Amrit Kaal
Context:
- Government has taken several initiatives to make accessible and affordable civil aviation which is significant for the aviation sector and tourism sector.
- Today, India is the third largest domestic civil aviation market in the world after China and the US. Domestic passengers more than doubled from 60 million in 2014 to 143 million in 2020, prior to Covid-19.
- There has also been a significant increase in international air passengers — from 23 million to 35 million.
- India’s civil aviation sector has not only democratised air travel by adding crores of first-time fliers but it has also provided employment opportunities for engineers, trained technicians and airline service staff
Government’s initiative to make affordable and accessible Civil aviation sector
- Flying is no longer looked upon as an elitist luxury but a necessary service
- Many private airlines have attempted to attract India’s large middle class into becoming commercial air travellers by offering no-frills, cost-effective services. Central to this strategy was to make flight operations to Tier-2 and Tier-3 cities commercially viable.
- To accelerate this, in 2017, the Government of India approved a budget of Rs 4,500 crore for the revival of existing unserved and underserved airports and airstrips through the Regional Connectivity Scheme (RCS). Since then, UDAN ‘Ude Desh ka Aam Nagrik’ which aims to expedited connectivity to Tier-2 and Tier-3 cities
- Today, approximately 475 UDAN routes involving 73 airports including nine heliports and two water aerodromes have been operationalised. About 75 routes, which is more than 15 per cent, connect the Northeast where terrain and other challenges require a robust air network.
- Since its inception, over 1.14 crore passengers have travelled in more than 2.16 Lakh UDAN flights and Rs 2,300 crore has been paid to selected airlines by the government as a part of the viability gap funding.
- As a result, the number of operational airports in India has almost doubled from 74 to 147 in the last eight years.
Spillover effect on employment generation: As flight operations in India continue to grow, the fleet size is expected to increase rapidly. To keep the aircraft airworthy, regular maintenance, repair and overhaul (MRO) is required.
- The growth in the country’s fleet size is positively correlated with the growth in MRO-related work.
- To capitalise on this, the government issued new MRO Guidelines to encourage MRO organisations and OEMs to set up workshops in India.
- The steps taken towards making India a global hub of MRO include 100 per cent Foreign Direct Investment permitted via automatic route for MRO, a liberalised policy for borrowing and lending in foreign currency and Indian currency on competitive terms for MROs and reduction of GST from 18 per cent to 5 per cent with full Input Tax Credit.
- As the Indian fleet size grows, the need for flying staff including commercial pilots, transport pilots and others will increase. At 1,165 commercial pilot licences, 2022 saw the largest number of commercial pilot licences issued over the last decade. The need for pilots has also led to an increase in Flight Training organisations (FTOs).
- Last year, the government issued guidelines for Production Linked Incentives (PLI) for drones with an outlay of Rs 120 crore over three years.
- The target segment contains drones and drone components. Coupled with this there has been a massive liberalisation of the drone policy under which 25 forms have been reduced to just five.
- Another area where civil aviation policy has contributed is in the area of agriculture. The Krishi Udan Scheme is focused on transporting perishable food products of farmers from the hilly areas, north-eastern states and tribal areas.
- India’s civil aviation ministry has also been instrumental in rescuing Indians and foreign nationals during emergencies.
- As a part of the Vande Bharat Mission, India operated air bubbles to facilitate the travel of 1.83 crore passengers during the various COVID-19 waves. Further, Operation Ganga rescued 22,500 Indian students from Ukraine at the peak of the Russia-Ukraine conflict.
- It also leads to exploration of the tourism sector potential and development of religious circuit
Conclusion:
Therefore, Government’s initiative in civil aviation leads to development of infrastructure, accessibility to affordable commercial flights and generation of employment in multiple areas of economy.