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The Big Picture – Has Inflation been tamed?

 

Summary:

Both the CPI and WPI have seen huge declines.

This has led call for rate cuts by the RBI.

Reasons for the decline in inflation rate:

  • Fall in international crude oil prices. Crude oil forms a very significant proportion of the total basket of goods which goes into the index.
  • MSPs have not been raised.
  • Base effect.
  • RBI has also kept monetary policy tight.
  • Decline in incomes particularly in rural area. Government spending has decreased.
  • Demand compression is also one of the reasons for the decline in inflation.

The common man is feeling the pressure. Some food prices have gone up. Food takes 68% of average Indian household budget.

To tame inflation tiding over the structural weaknesses of the economy would be very important.

6 months immediately after 2008 crisis India had negative to near zero inflation rate.

It is also true that oil forms 15% of the total basket.

Due to low growth rate, there is low demand in the production side. However, the consumer demand has not dampened.

NSS data shows that jobs at the bottom of the pyramid continue to grow. They might not be growing in the organized sector but, in unorganized sector they are growing.

People are leaving agricultural work to join non agricultural work because wages are high in non agricultural work.

Structural constraints have not been addressed yet.

It is also being said that government’s role in bringing down the inflation rate has been very less.

This is termed as a temporary thing happening because of combination of factors.

Given the amount of bad debts the RBI might not go for the rate cuts.

RBI in this country is not independent. RBI governor has to take orders from the Finance minister and the secretary of the Department of economic affairs.

Uncertainty about the government’s fiscal situation has also held back RBI from reducing