December , 2022
Persisting inflation hindering growth and increasing hardship of people
23:37 pm

Kishore Kumar Biswas

Price inflation in the Indian economy has been persisting by more than 6% - the upper tolerance limit of RBI - for 10 months in a row. It is mandatory for the RBI to answer India’s government if the inflation remains 6% or more for more than two quarters sequentially. After the Monetary Policy Committee (MPC) meeting held last September, Shaktikanta Das, RBI Governor, said, “The inflation trajectory remains clouded with uncertainties arising from continuing geopolitical tensions and nervous global financial market sentiment.” This means that RBI has not been able to tame inflation by applying its monetary policy. From May, RBI hiked the repo rate four times and by 190 basis points (that means 1.9%). Many observers think that inflation in India will persist and in December, the MPC may further increase the repo rate by 50 basis points.

Some ground work to understand inflation

At the outset, one must know the meaning of inflation. It is a condition of persistent rise in general levels of prices. All the prices of commodities may not rise at the same time and even prices of some goods may fall in that period of general price rise. There are mainly two types of indices to measure inflation. The consumers’ price index (CPI) and the wholesale price index (WPI). When inflation is measured by some index that uses all prices, usually the WPI, it is called headline inflation. It is seen that prices of food and fuel have special significance due their vulnerability. In that case, one gets core inflation which is obtained by subtracting food and fuel inflation from core inflation.

The reasons for rising inflation are increasing aggregate demand in the economy that raises the general price level. It may happen due to rising income of people or a sudden upsurge of demand for goods and services due to various reasons. So, depending on the same level of production, the price level rises. On the other hand, inflation rises when the cost of production rises. This is called cost push inflation. Rising input costs of production including wage rates is the main reason for this inflation.

Present inflation pressure in India

In India inflation is measured by the CPI for policy purposes. In India, retail inflation has been above the 6% level since the beginning of 2022. Earlier this month, data from the Ministry of Statistics and Programme Implementation (MoSPI) show that the retail inflation has been moderating further to a three-month low of 6.77% in October. A section of observers got hope of peaking inflation as it reached 7.8% last April. But going deeper, economists notice that headline inflation moderated but core inflation has touched 6.1%. In this case, Nomura Research reportedly said that core goods inflation has gone up to 7.3% - which means that inflation is not only high but also sticky - indicating that inflation will persist in the Indian economy for many more months.  

High inflation due to global reasons

India’s high inflation has been due to both internal and external reasons. Core inflation is high due to shortages of some food items. When the supply will increase, it may come down. At the same time, India is highly dependent on both petroleum oil and edible oil. As oil prices are not taming, the core inflation will remain high. Among the external factors, the supply chain of many imported items is not working properly due to the Russia-Ukraine conflict and prices of imported inputs are on the higher side. The economies of the US and EU have been suffering from very high inflation and economic slowdown. Central banks of these countries have raised their policy rates to lower inflation. As a result, the rate of interest is very high in those countries. Huge amount of foreign exchange has already out-flowed from India and many other emerging markets in this uncertain situation. Exchange value of Rupee has fallen to around `82 per dollar.

Government and RBI policies

The Indian government has already taken several fiscal policies which include financial help to production units. At the same time, import duties have been lowered for some items and the government has also banned some food items. Recent decision to repeal export duty on steel products may help the industry. But many more fiscal policies are needed.

Many observers are doubtful about the effectiveness of the inflation targeting policy of the RBI. Economic and Political Weekly has raised this issue in one of its editorials. Soumen Sikdar, Professor of Economics at IIM, Calcutta in his book Principles of Macroeconomics (Oxford University Press), page 221, points out, “The first problem with this framework is the difficulty of forecasting inflation accurately. Given the lag between the monetary policy action and inflation, low predictability entails that efficiency of targeting inflation is extremely difficult. Secondly, it is not easy to decide the optimum value of the target. The EU prefers 2% while our target is 4%. An arbitrariness is involved.”     


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