Managing India’s food and beverages Inflation

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    In News

    • India needs to focus on cereal and milk inflation, both of which have high weights in CPI.

    About the Inflation

    • Responsibility & objective:
      • In India, the RBI is entrusted with the responsibility of devising monetary policy with the primary objective of maintaining price stability while keeping in mind the objective of growth.
    • About Inflation:
      • Maintaining the inflation level:
        • The central bank is supposed to target a 4% retail inflation level, although the RBI has the leeway of inflation going up to 6% or falling to 2% in any particular month. 
        • Some degree of inflation is desirable as it promotes economic activity.
      • Relation of growth & inflation:
        • Typically when an economy experiences fast economic growth — that is, there is a lot of demand in the economy — prices rise.
      • Drivers of Inflation:
        • Demand-pull Inflation: 
          • Increases in prices due to the gap between the demand (higher) and supply (lower).
        • Cost-push Inflation: 
          • Higher prices of goods and services due to increased cost of production.
        • Exchange Rates: 
          • Exposure to foreign markets is based on the dollar value. Fluctuations in the exchange rate have an impact on the rate of inflation.
        • Demand-supply gap: 
          • High demand and low production or supply of multiple commodities create a demand-supply gap, which leads to a hike in prices.
    • How is Inflation measured?
      • 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. 
    • What are WPI and CPI inflation rates?
      • Consumer Price Index (CPI)
        • It is an index measuring retail inflation in the economy by collecting the change in prices of most common goods and services used by consumers.
        • CPI is also called a market basket, it is calculated for a fixed list of items including food, housing, apparel, transportation, electronics, medical care, education, etc.
        • The base Year for CPI is 2012.
      • The Wholesale Price Index(WPI):
        • The new series of Wholesale Price Index(WPI) with base 2011-12 is effective from April 2017. 
        • WPI captures the average movement of wholesale prices of goods and is primarily used as a GDP deflator. 
        • WPI(2011-12) reckons only basic prices and does not include taxes, rebate/trade discounts, transport and other charges.
        • WPI-based inflation data is put together by the Department for Promotion of Industry and Internal Trade (or DPIIT).

    Issues & Challenges with food and beverages component in the Indian CPI

    • Management of food and beverages component:
      • The food and beverages component in the Indian CPI has a weightage of 45.86 percent, the highest amongst G20 countries. 
      • Managing this component to around 4 percent is critical to taming overall inflation. 
      • Interestingly, this component of inflation can not be managed only through monetary policy, nor even by fiscal policy. 
        • Triggered by external shocks:
          • 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.
        • Affected by changes in wether:
          • The brewing El Nino is a looming danger and it’s feared that it could cause below normal rainfall, even a drought. 
          • So, it may be worth thinking about how best to keep food inflation below 4 percent in case the monsoon rainfall turns out to be below normal.
    • Protection for Rice & wheat crops:
      • The biggest crop of the kharif season is rice. And rice inflation (non-PDS) for April was 11.4 percent. 
      • Wheat inflation — that of the most important rabi crop — is still very high at 15.5 percent. 
        • More than 800 million people are getting free rice and/or wheat (5kg/person/month) under the PM-Garib Kalyan Yojana
          • So, they are well protected from rice & wheat inflation
        • The rice stocks with the Food Corporation of India (FCI) are more than three times the buffer stock norms for rice. 
          • If the government wants to tame rice price inflation, it 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.
        • The wheat procurement has been sufficiently good (touching 26MT) to meet the requirements of the public distribution system (PDS) — around 22 MT — and give some room for open market operations.
    • Cereal inflation:
      • The overall cereal and products inflation is still at a very uncomfortable level, 13.7 percent.
        • To tame cereal inflation, we have to use the buffer stocking policy more proactively. This would be much more effective than any monetary policy instrument. 
        • However, there is a concern about milk and milk products. 
    • Milk inflation:
      • India is currently facing price inflation in milk mainly due to milk fat shortage.
      • It has led dairies to increase full-cream milk prices more or to cut down fat content through rebranding of existing products. 
      • There have even been reports of branded ghee and butter disappearing from store shelves.

    RBI’s Monetary tool to tackle with the inflation

    • When inflation runs high, RBI raises the repo rate — the interest rate it charges banks when it lends them money. 
      • Doing this incentivises savings and disincentives expenditure, thus curtailing overall demand and GDP. 
      • That, in turn, reduces the inflation rate.
    • In times of weak economic activity, RBI cuts the repo rate and by the reverse logic, boosts demand and economic output.
    • All these critical decisions about the repo rate are taken by the MPC, which meets once every two months to assess inflation and growth outlook.

    Headline, core & retail inflation

    • Headline inflation:
      • Headline inflation refers to the change in value of all goods in the basket.
      • Headline inflation is more relevant for developing economies than developed economies.
    • Core inflation:
      • Core inflation is arrived at by removing the inflation in food and fuel from headline inflation. By removing food and fuel inflation (since these prices fluctuate more wildly), core inflation provides a more robust measure of inflation in the economy.
      • Core inflation is less volatile than headline inflation.
    • Retail inflation:
      • Retail inflation is the inflation (or rise in the general price level) that everyday consumers face.

     

    Daily Mains Question

    [Q] Managing the food and beverage inflation to around 4 percent is critical to taming India’s overall inflation. Discuss. Examine the impact of external shocks on India’s Consumer Price Index (CPI).