07

wo years ago, when the Covid-19 pandemic gripped the world, developed economies benevolently extended unemployment benefits along with job protection schemes. This was something that John Maynard Keynes had advocated during The Great Depression of 1929 to avoid the ‘paradox of thrift’ i.e., an increase in savings resulting in a decrease in aggregate demand. Efforts of the governments fructified and a year later i.e. in 2021, this move ushered in the recovery of major economic fundamentals alongwith reduction in unemployment, but with higher inflation. Policymakers termed this hike in prices as transitory and indicted choked supply chains and labour shortage as the main causes. However, Russia’s attack on Ukraine in February 2022 led to the global shortage of commodities like crude oil, coal, fertilizer, natural gas, sunflower oil and nickel etc. which led to a multi-decade high inflation in the developed world in particular. Gradually, this surge in inflation spiraled and gripped the emerging and developing economies as well. Table 1 indicates how the level of retail inflation has swelled manifold in different countries of the world in the last one year or so. Significant increase in retail inflation can be seen in the context of the United Kingdom and European Union. Interestingly, inflation in Japan that was in the negative zone during Covid–19 has landed into positive territory since September 2021.

Table 1

Level of Retail Inflation in Different Countries of the world

(in percent)

Source: Various Reports of International Monetary Fund

INFLATION IN INDIA

To the extent India is concerned, the inflation level has remained particularly high in terms of wholesale price inflation (WPI) since April 2021. Prices of commodities, metals, edible oils, crude and natural gas were increasing due to supply chain shortages, loading and unloading costs besides increase in shopping costs. The Russia-Ukraine war intensified the crisis. Table 2 indicates how WPI has been stuck in double digits for the past one year. Not only this, it has moved up from 11.16% in July 2021 to 13.93% in July 2022 (15.18% in June 2022). In the context of primary articles comprising food, non-food, minerals and crude, petrol and natural gas, inflation has increased from 5.72% (in July 2021) to 15.04% (in July 2022). Inflation in crude, petrol and natural gas remained predominantly high which almost doubled between July 2021 (40.28%) and June 2022 (77.29%). Outbreak of war between Russia and Ukraine jacked up inflation in crude, petrol and natural gas. Sanctions on Russia further jeopardised the supply of crude oil and India being the net importer of crude oil had to dance to the tunes of oil supplying nations in terms of high prices. Not only the hike in prices got restricted to crude or

Table 2

Change in All India Inflation Rate Based on WPI 

(in percent)

Note: Figures in parentheses indicate the weight in total 

Source: NSO, Ministry of Statistics and Programme Implementation

natural gas, rather the industries where these two are used as major inputs like coal mines, fertilizer, cement experienced a seamless increase in prices. Accordingly, fuel and power inflation in India increased from 26.02% (July 2021) to 43.75% (July 2022). Manufactured products that stand as a key component of WPI witnessed an easing of prices since December 2021. But much of this is attributed to the base effect since manufactured products saw an increase in prices in the year 2020-21.

High WPI inflation connotes that producer’s cost of production has increased and the burden of it has been/will be shortly transferred to the consumers. This fact can be testified from the inflation numbers released by the Ministry of Statistics & Programme Implementation (MoSPI) for the Consumer Price Index (CPI). Though CPI for the month of July 2022 came down to 6.71% and was at its five months low, yet, it has continued to sail higher than the tolerance limit of Reserve Bank of India (RBI) i.e. 2-6%. Table 3 indicates that after December 2021, retail inflation has increased in all the groups except pan, tobacco and

Table 3

Change in All India Inflation Rate based on CPI 

(in percent)

Note: Figures in parentheses indicate weight of that group in total group

Source: NSO, Ministry of Statistics and Programme Implementation

intoxicants. Retail inflation (table 3) has got a direct concurrence with wholesale inflation (table 2). The months in which wholesale inflation increased, retail inflation also increased and vice-versa. Amid this, it is not difficult to project that in the near future too, if inflation in terms of WPI will remain high, the same increase will be passed on to the consumers and accordingly the retail inflation will remain high. But there are other factors too which are expected to keep retail inflation high, the details of which are discussed in the next section.

INFLATION IN NEAR FUTURE

In the international perspective, increased inflation rates in the US, UK, Canada, and European Union have forced their central banks to raise the rate of interest, sooner than later. This unnatural hike in interest rates obstructed GDP growth and accordingly the numbers for global growth were revised by the IMF. Global GDP growth is now projected to be 3.2% this year i.e. 0.4 percentage points less than earlier estimates. Not only this, China’s slowdown is worsening amid Covid lockdowns thereby compelling China’s central bank to reduce interest rates. Amid this, it can be naturally anticipated that inflation in commodities, metals, edible oils and food will cool down and India, which is a net importer country, can heave a sigh of relief. But two factors can spoil the sport i.e., prices of crude oil and depreciation of the Indian Rupee. On the crude front, uncertainties with respect to cutting down of supplies by Saudi Arabia, likelihood of Iran-Russia natural gas cartel, stretching of the Russia-Ukraine war, dependence of European Union on Gulf countries for additional supplies of crude oil and natural gas etc. can harden the prices of crude oil. Similarly, on the part of the Indian Rupee if the US Fed continues to increase the interest rates, then outflow of foreign portfolio investment cannot be arrested leading to the deprecation in the Indian Rupee. Such factors in future may neutralize the gains from the cooling down of inflation in commodities, metals, food items and edible oils in the international market.

Fear of inflation scaling up in the near future is coming from both the food and non food factors on the domestic front as well. On the food end, low stocks of wheat, shrinkage in sowing area of major kharif crops and recent hike in prices of milk are anticipated to keep retail inflation high. Correspondingly, factors on non-food front comprise of imposition of GST on pre-packaged goods, increase in prices of CNG/PNG and auction of 5G spectrum to telecom companies.

Prices of wheat in the domestic market have already skyrocketed due to the sluggish attitude of the government. Conflict between Russia and Ukraine (the two largest wheat exporters), caused supply chain disruptions globally thereby increasing the demand for Indian wheat. However, the Indian government in mid May this year, apprehending a shortage in the domestic market imposed a ban on wheat export. Prohibition on wheat export augmented the export of wheat flour and the Indian government woke up to ban the export of wheat flour only on August 24, 2022. Increase in prices of wheat over and above MSP encouraged farmers to sell their wheat to the exporting companies (in the rabi season), thereby decreasing the procurement by the government. It has thus dashed the hopes of government intervention in cooling off the wheat prices by supplying more wheat from the reserve food stocks. Till the time new season supplies hit the market in March 2023, wheat prices are expected to keep food inflation high.

More than 80% of India’s total rice production comes from the kharif season and according to Ministry of Agriculture data, sowing of paddy is 8-10% less than the previous year figures. Shortfall in monsoon rains in Jharkhand, West Bengal, Odisha, Bihar, Uttar Pradesh and Chhattisgarh have taken a toll on paddy sowing. Same is the case with pulses and oilseeds where sowing has been hit due to heavy rains in western India and Rajasthan that produce much of these two crops. Low stocks of wheat and rice are compelling the government not to extend the Pradhan Mantri Gareeb Kalyan Anna Yojana (PMGKAY) from September onwards. Pertinently, 80 crore people are given 5 kg free wheat and rice under PMGKAY. Another factor that may push inflation towards north is an increase in prices of milk brought in by Amul, Mother Dairy etc. citing increase in input costs like green fodder, transport, logistics, manpower, and energy besides lumpy skin disease among the animals. Increase in prices of processed forms of milk is further expected to keep food inflation high. Above this, imposition of 5% GST on prepackaged foods like wheat, rice, curd, honey, meat and fish etc. will also drive inflation high.

Increase in prices of natural gas by Gas Authority of India Limited on August 2, 2022 led to the amplification of increase in prices in both Compressed Natural Gas (CNG) and Piped Natural Gas (PNG) thereby escalating travel and kitchen bills, aftermaths of which will reflect with a lag sometime in near future. The recently concluded 5G spectrum auction of `1.5 trillion to the telecom companies is compelling the mobile carriers to increase tariffs to realize funds for the payment of amount borrowed and to make further investment. There is an anticipation that tariff hike will be announced by all the telecom companies which will dent the pockets of all the 4G users as well.  

To sum up, apprehension of a sizeable increase in inflation in near term amid slowing growth, high job loss and unbridled decrease in income is a bad news that needs to be curbed by the government by taking appropriate steps timely.