Why in the News?
Retail inflation dropped to 3.16% in April, marking its lowest level in nearly six years. This shows that prices are rising more slowly, bringing relief to consumers and policymakers.
What caused the recent fall in retail and wholesale inflation in April?
- Sharp Drop in Vegetable Prices: Retail inflation was driven down by a nearly 11% drop in vegetable prices. Eg: Wholesale potato prices fell by 24.3% compared to April last year.
- Falling Crude Oil and Fuel Prices: Crude oil and natural gas inflation hit a 22-month low of -15.55%. Eg: Petrol prices contracted by 7.7%, and diesel by 5.04% at the wholesale level.
- Government Measures to Control Prices: Actions like open market foodgrain releases, buffer stock management, and eased imports helped stabilize supply. Eg: These steps helped prevent food shortages and kept overall food inflation at 2.55%, a 22-month low.
Why is the contraction in vegetable prices considered partly due to the base effect?
- High Inflation Last Year (Base Effect): In April last year, vegetable inflation was very high, in the range of 27%-30%. Eg: A sharp rise last year creates a high base, making even stable or slightly falling prices this year appear like a large drop.
- Statistical Comparison Distortion: Inflation is measured year-on-year, so a high base can exaggerate the percentage fall in the current period.Eg: If tomato prices were ₹100 last year and are ₹90 now, it shows a 10% fall—but last year’s ₹100 was unusually high.
- Not Solely Due to Supply Improvement: The large fall in prices this year is not only because of better supply or government action but also due to last year’s spike. Eg: Last year’s shortages due to unseasonal rains had led to higher prices, inflating the base.
How have government actions helped in easing inflation?
- Strengthening Buffer Stocks: The government has maintained adequate buffer stocks of food items like rice, wheat, and pulses to manage supply shocks. Eg: Releasing pulses from buffer stocks during price spikes helped stabilise market supply and reduce inflationary pressure.
- Open Market Sales to Regulate Prices: Through open market operations, the government released surplus food items into the market to control prices. Eg: Open sale of onions and tomatoes by agencies like NAFED helped bring down retail prices during seasonal spikes.
- Relaxation of Import Restrictions: The government eased import norms and reduced import duties on key commodities during shortages. Eg: Reduction in import duties on edible oils and pulses led to higher supply and reduced food inflation.
What policy actions are expected from the RBI and the government based on the latest inflation data? (Way forward)
- Likely Cut in Interest Rates by RBI: With inflation easing, especially retail inflation falling for six consecutive months, the RBI’s Monetary Policy Committee (MPC) may cut policy rates to support growth. Eg: The RBI might reduce the repo rate in the upcoming June review to boost borrowing and investment.
- Reduction in Fuel Prices by Oil Marketing Companies: With crude oil inflation hitting a 22-month low, the government is expected to direct public sector oil companies to cut petrol, diesel, and LPG prices. Eg: Despite a 42% fall in global crude prices over three years, retail fuel prices remained almost unchanged; a correction is now anticipated.
Mains PYQ:
[UPSC 2024] What are the causes of persistent high food inflation in India? Comment on the effectiveness of the monetary policy of the RBI to control this type of inflation.
Linkage: “India’s Easing Inflation and Policy Implications” discusses the latest inflation data, noting the easing of both retail and wholesale inflation, largely driven by a contraction in vegetable and pulse prices.
Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024
