Roiling resurgence

General Studies Paper 3

CONTEXT

• The latest Consumer Price Index data showing a resurgence in retail inflation proves exactly why the RBI’s monetary authorities have reiterated the need to keep the policy approach firmly tilted towards ensuring price stability.

THE INFLATION FIGURES

• With food prices becoming unmoored and spiralling up, June’s CPI-based provisional inflation reading accelerated by half a percentage point to a three-month high of 4.81%.
• Inflation in the food and beverages group, the single-largest constituent of the CPI that contributes almost 46% of its weight, led the resurgence, quickening from May’s level to 4.63%.
• The food price inflation was broad-based with 10 of the 12 sub-groups witnessing year-on-year increases: cereals registered 12.7% price gains, eggs logged 7%, dairy experienced 8.56% inflation, pulses posted 10.5% and spices saw gains exceed 19%.
• Month-on-month, vegetable price inflation soared to 12.7%, the highest sequential rate of price gains in the essential food group since October 2021.
• With the exception of three vegetables, including lady’s finger and lemon, in the 19-member basket, all the others including the most widely used potatoes and onions registered sharp sequential inflation.
• Of the non-food items, clothing and footwear, as well as health and personal care saw price gains that exceeded 6% in June.
• Education prices too continued to keep rising steadily.

TACKLING INFLATION

MONETARY POLICY MEASURES

• Using contractionary monetary policy, the money supply in the economy can be decreased. This leads to decrease in aggregate demand in the market and thereby reduces inflation.
• Decrease in supply of money → rate of interest increases → Investment decreases → Aggregate demand decreases → prices decline → rate of inflation is lower
• Rates like CRR, SLR, Repo Rate and Reverse Repo Rate are increased to impact the money supply in the economy by the RBI to control inflation.

FISCAL POLICY MEASURES

• Fiscal Policy refers to the revenue and expenditure policy of the government. Contractionary Fiscal Policy can be useful to tackle high inflation rates.
• The process is as follows: Increased taxes (keeping government spending constant) → disposable personal income decreases→ consumption decreases → aggregate demand decreases → prices decline → rate of inflation is lowered
• Similar process follows if the government cuts down on its expenditures without raising taxes (or reduces its deficit/ increases surplus).
• Some of the fiscal policy measures are – reducing import duties, banning exports or Imposing minimum export prices, suspending the futures trading of commodities, raising the stock limit for commodities, etc.

SUPPLY MEASUREMENT MEASURES

• Supply Management Measures aims to increase the competitiveness and efficiency of the supply chain, putting downward pressure on long-term costs.
• Some of the supply management measures taken are- Restricting exports of commodities in short supply and increasing their imports.
• Effective implementation of the Essential Commodities Act, 1952 to prevent hoarding and speculation.
• Incentivizing the increase in production of commodities through tax concessions, subsidies, institutional support etc.
• Higher MSP has been announced to incentivize production and thereby enhance the availability of food items which may help moderate prices.
• Fixing the ceiling prices of the commodities and taking measures to control the black marketing of those goods.
• Reforming the supply chain through infrastructure development, foreign investments etc.

CONSTRAINTS IN CONTROLLING INFLATION

• India imports more than 80 percent of its oil requirements. Oil prices are volatile owing to the various Political and Economic events in the international arena.
• Long overdue supply-side reforms.
• Inefficiencies in the monetary policy transmission.
• Limited control of Government and RBI in controlling rupee depreciation.
• Political compulsion in reducing expenditure and fiscal deficit.
• Populist measures of the government.

CONCLUSION

• Policymakers must tighten their grip over prices to prevent the broader economic recovery from floundering.