Economic Indicators and Various Reports On It- GDP, FD, EODB, WIR etc

India specific factors that have bearing on inflation trajectory

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Inflation triggering factors

Context

Inflation is turning into a global concern fueled by multiple global factors. However, in India there are a few other triggers that will have a bearing on the inflationary trajectory.

Global inflation concerns

  • All that could have possibly triggered higher inflation globally has already occurred — multiple waves of the pandemic, supply disruptions, an overdose of policy stimuli, war, sanctions, energy shocks, geopolitical adversity and weather disruptions.

1] Impact of MSP on inflation

  • The MSP that is fixed by the government for kharif and rabi crops has been one of the key policy instruments.
  • Policymakers in India have often acted with alacrity to protect the interests of farmers over the years.
  • In the last 20 years, the weighted average MSP for kharif crops saw double-digit growth four times — in 2007, 2008, 2012 and 2018.
  • Food inflation shot up to 12 per cent in 2007-08 as against 8 per cent in 2006-07 and 4 per cent in 2005-06.
  • The inflationary surge continued in 2009 as a monsoon failure hit agricultural output hard.
  • Global agricultural commodity prices started to rise in 2010 again and the FAO food price index reached an all-time high in July 2012.
  • One of the key reasons for the increase in food prices was the oil price surge and a rise in demand for biofuel production.
  • The global upside in food prices coincided with a 22 per cent increase in MSP for Kharif crops in India.
  • Following the rise in MSP, food inflation in 2012 increased by 14.6 per cent as against 3.6 per cent the preceding year.
  • In  2018, for the first time, the MSPs for all 23 kharif and rabi crops were fixed at a margin of at least 50 per cent higher than the cost of cultivation.
  • The cost of cultivation (A2 + FL) includes the paid-out cost and cost of imputed family labour.
  • Accordingly, the MSP of kharif crops in 2018 saw an annual increase of about 14 per cent.
  • However, despite the significant rise in MSP, food inflation in 2018-19 was muted at 0.3 per cent.
  • This was because farm input costs were under control and the terms of trade for farmers remained positive.

2] Impact of GST on inflation

  • Raising the revenue-neutral rate: In the upcoming meeting, there is talk of changes in GST slabs and rates with an eye on raising the revenue-neutral rate from around 11.5 per cent, which is far lower than the 15.5 per cent estimated at the time of the launch of GST.
  • Avoid the shock: However, a GST rate shock to the system is best avoided given the global inflationary backdrop and the fragility of consumer balance sheets.

3] Influence of weather

  • While the dependence of agricultural output on the quantum of rainfall has reduced, variance in the spatial and temporal distribution of rainfall is emerging as a key risk.
  • A look at 2021 — a normal monsoon year with rainfall at 99 per cent of its long period average — is instructive.
  • The late excess rains delayed the crop cycle and led to crop damage in several parts of the country.
  • Likewise, the spatial distribution of rainfall remained uneven in 2021.
  • Thus, even with normal rainfall in 2021, there were several disruptions to the crop cycle and farm cash flows.

Conclusion

The government has taken various steps lately to rein in inflation. However, the RBI will have little freedom in case the GST council decides to accord revenue protection to states via higher GST rates or if the monsoon is not in line with expectations. One hopes these events pan out right, like the MSP hike, when most other things have gone wrong.

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