Prelims: Current events of national importance, RBI, Inflation, Food Price Inflation, WPI, CPI, MPC etc
Mains GS Paper III: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment(Inflation, Monetary policy).
ARTICLE HIGHLIGHTS
- The former Deputy Governor of the Reserve Bank of India, Viral Acharya, observed that, unlike in the West where it abated with COVID-19, core inflation remains elevated in India.
- He ascribes to the pricing power of five big corporates (‘Big 5’).
INSIGHTS ON THE ISSUE
Context
Inflation:
- Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.
- Inflation measures the average price change in a basket of commodities and services over time.
- The opposite and rare fall in the price index of this basket of items is called ‘deflation’.
- Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency.
- RBI through its Monetary Policy Committee(MPC) Controls Inflation with its tools to control Money supply in the market.
- Inflation is measured by a central government authority, which is in charge of adopting measures to ensure the smooth running of the economy.
- The Ministry of Statistics and Programme Implementation measures inflation.
- Inflation is primarily measured by two main indices:
- WPI (Wholesale Price Index) and CPI (Consumer Price Index), which measure wholesale and retail-level price changes, respectively.
Types of inflation:
- Demand Pull Inflation: Demand pull inflation arises when aggregate demand in the economy becomes more than aggregate supply.
- Cost push inflation: when there is a decrease in aggregate supply of goods and services results in an increase in cost of production.
Causes of Inflation:
Is corporate pricing power driving inflation in India?
- A divergence between inflation rates in India and the rest of the world:
- After the global financial crisis of 2008, Indian inflation surged, reaching levels higher than in its epicenter(United States and the United Kingdom).
- This was due to a surge in food price inflation in India, driven by negative agricultural shocks and high procurement price hikes.
- The food-price inflation tends to feed into core inflation, it would be hasty to conclude that Indian inflation is higher than in the West today due to corporate pricing power.
- Wholesale price (WP)(February):
- food-price inflation was 8(two point eight)%
- manufactured products, the largest commodity group in the index, was lower at 2% (Ministry of Commerce).
- With food price inflation in India unabated, there is no reason to assert that core inflation should have declined even if it has in the West.
- There is evidence that food price inflation affects core inflation.
- Corporate power underlies elevated core inflation:
- The wholesale price inflation has eased in the six months preceding March 2023, consumer price (CP) inflation has not (National Statistical Office)
- A mismatch between WP and CP inflations
- In 2021-22, WP inflation had surged by 12 percentage points but CP inflation actually declined (Reserve Bank of India, 2022).
- The maintenance of high price increases by firms in the retail sector even after wholesale price inflation has declined in 2022-23 is a compensating mechanism
- e., the rising input cost of the retail sector is being passed on with a lag.
- Attributing elevated core inflation in consumer prices, as wholesale prices fall
- The pricing power of the Big 5 assumes that these conglomerates have a high presence in retail trade.
- Their presence in the economy itself may not be so high.
- They account for 12% of non-financial sector sales.
- Comparing WP inflation with CP inflation whether headline or core, is to acquiesce in a mismatch.
- The commodity basket corresponding to CP includes such items as housing, health, education, recreation and personal care
- They naturally do not enter the wholesale price index.
- First three quarters of the financial year:
- In all of them, over 75% of the direct contribution to inflation is by sectors in which the Big 5 are unlikely to be represented in a big way
- The contribution of food products alone is close to 50% in most time periods.
- It is the rising price of food that is driving current inflation in India.
Way Forward
- In theory, corporates can drive inflation if concentration rises continuously and if they come to dominate the economy, in this case retail trade.
- The sectors in which the Big 5 are most represented account for less than 25% of the consumer price index.
- Industrial concentration is rising in India, and the consequences matter more than prices.
- While public policy in India has a history of being alert to concentration in industry, concentration in the services, as in telecommunications, and in infrastructure, as in ports, is relatively new and it may only just be coming to terms with its implications.
- Countervailing power: As a democracy, India should guard against the potential use of countervailing power by any body pursuing a private interest, whether economic or social, and irrespective of its consequences for inflation.
- Framing of the discourse on inflation in terms of core inflation, as when the role of corporate pricing power was brought up, to be limiting.
- Core inflation leaves out the inflation in food and fuel prices on grounds that these prices tend to fluctuate and do not require a policy response.
- All the Reforms’ since 1991, the real price of food, i.e., its price relative to the general price level, has risen considerably.
- To measure inflation without considering the price of food is to exclude what matters most to the public, as opposed to central bankers.
- India’s inflation control strategy is currently restricted to using the interest rate to dampen aggregate demand.
- It conveniently absolves the policymaker from addressing the challenge of ensuring the production of food at affordable prices.
- The recent intervention purporting to explain core inflation in India may have had a beneficial fallout after all.
QUESTION FOR PRACTICE
Is inclusive growth possible under market economy ? State the significance of financial inclusion in achieving economic growth in India.(UPSC 2022) (200 WORDS, 10 MARKS)
