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

The cost of misrepresenting inflation

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Food inflation in India

Context

Globally, inflation is now the prime concern of governments, even as there is a speculation that a recession may not be far behind.

Is inflation in India driven by the global factors?

  • The Governor of the Reserve Bank of India (RBI) has been reported as saying that there was a “need to recognise global factors in inflation”.
  • However, the current inflation in India is, even largely, due to global factors is wrong, and harmful.
  • While the price of edible oils and the world price of crude may have risen following the Ukraine war, the impact of this development on overall inflation in India, measured by the rise in the consumer price index, would depend upon their share in the consumption basket of households, which is relatively low.
  • For the commodity groups ‘fuel and light’ and ‘fats and oils’, chosen as proxies for the price of imported fuel and edible oils, respectively, inflation has actually been lower in the first five months of 2022 than in the last five months of 2021.
  • On the other hand, for the commodity group ‘food and beverages’, it was exactly the reverse, i.e., inflation has been much higher in the more recent period.
  • Contribution of domestic factors: The estimated direct contribution of this group to the current inflation dwarfs that of all other groups, establishing conclusively that the inflation is driven by domestic factors.

Inadequacy of monetary policy to address the food-price driven inflation

  • Issues with the monetary policy: Starting in May, the repo rate has been raised.
  • Raising the interest rate in an attempt to control inflation, implicitly assumes that it reflects economy-wide excess demand.
  • Such a diagnosis of the current inflation is belied by the fact that the price of food is rising faster than that of other goods i.e., its relative price has risen.
  • So, the excess demand is in the market for foodstuff, and it is this that needs to be eliminated.
  • The inadequacy of monetary policy to address food-price-driven inflation has been flagged by economists internationally.
  • at the World Economic Forum’s annual meet held at Davos, Switzerland in June, Nobel Laureate Joseph Stiglitz observed that raising interest rates is not going to solve the problem of inflation. It is not going to create more food.
  • Jerome Powell is reported stating that even though the Fed’s resolve to fight inflation is unconditional, “a big part of inflation won’t be affected by our tools”.
  • This is an acknowledgement that there is only so much a central bank can do when battling inflation driven by the rise in energy and food prices.

Way forward

  • Need for supply side interventions:  To hold on to the view that inflation in India is due to excess aggregate demand curable by raising interest rates ensures that attention is not paid to the necessary supply-side interventions.

Conclusion

India is suffering from undercurrent of a food price inflation, which, by exacerbating poverty, stands in the way of a more rapid expansion of the economy.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments