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Inflation

What is the scenario of inflation in India?

1. Inflation, especially the headline inflation rate, in India has been under control.

2. From 2014 till April 2018, the year-on-year inflation rate estimated as the rate of change of the consumer price index (CPI) declined steeply from 6.65% to 2.42%.

3. It is within the range of 2%–6% of inflation as per the inflation-targeting framework of the Reserve Bank of India (RBI).

How are economic growth and inflation related?

1. The macroeconomic policy recognizes the significance of a “threshold level” of inflation.

2. While inflation above the threshold limit hurts economic growth, effect of low inflation rate on growth is mixed but mostly insignificant.

3. Currently, there is a hike in CPI-based inflation in India which is benign and can be controlled through RBI’s policy rate.

4. This hike is expected to stimulate private investment and consumption expenditure, thereby reviving the gross domestic product (GDP) growth to reach the 2019–20 target of 7% from current 5.8%.

Why is inflation significant?

1. Inflation targeting is a GDP-stimulating strategy.

2. Inflation with its multiple measures (such as CPI, wholesale price index [WPI], or the GDP deflator) and the relative price behaviour of the numerous services and commodities has different relevance for different players in the economy.

Where lies the importance of CPI?

1. Conceptually, the CPI is a better indicator of inflation for guiding monetary policy decisions than the WPI, because it captures retail inflation.

2. But RBI’s inflation targeting have little impact on the CPI wherein food and beverages have a combined weightage of almost 46%.

3. Much of the food price inflation/deflation in India is driven by supply-side issues such as the fluctuation in the brent crude oil prices in the global market and/or the variability of domestic crop production.

4. This was also a reason for political interventions of the government either for supply management such as imposition of export and stockholding restrictions and duty-free imports, or with policies like the demonetization and the goods and services tax.

Which factors should be taken into consideration?

Even when the inflation rate is within the RBI’s legislated mandate, it might make a negative impact on consumers because:

1. It is driven by food inflation, which, measured in terms of the WPI, has hit a 33-month high of 7.4%, primarily led by the sequential acceleration of the prices of key food items.

2. On a year-on-year basis, the pulses inflation is around 14%, while that of cereals is at 8.5%.

3. Possible poor southwest monsoon implies the risk of underproduction and further price hike.

4. Due to geopolitical uncertainties oil prices might increase, thereby exerting upward pressure on the food prices.

5. The farmers’ ability to benefit from such price surge will depend upon the state’s ability in managing the food economy.

Therefore, the government should adopt a holistic approach for development management in practice by temporarily not targeting GDP.