The government has implemented various short-term and medium-term measures to address inflation and enhance the availability of essential commodities. These measures include:
- Procurement and Buffer Stock:
- Record procurement of food grains to ensure sufficient domestic availability.
- Maintenance of food grain buffer stock to intervene in the market and stabilize prices.
- Creation of a strategic reserve of 5 million tonnes of wheat and rice for offloading in the market during periods of high prices.
- High-Level Review Meetings:
- Regular reviews of the price situation at high-level meetings such as the Cabinet Committee on Prices (CCP).
- Fiscal Measures:
- Reduction of import duties on food items.
- Subsidies provided under the Food Security Act 2013.
- Adjustments in Goods and Services Tax (GST) to reduce indirect taxes.
- Administrative Measures:
- Ban on exports of certain food items.
- De-hoarding initiatives to prevent the accumulation of large quantities of goods.
- Establishment of Jan Aushadi shops for the availability of affordable medicines.
- Implementation of Ayushman Bharat for free medical and health services.
- Monetary Measures:
- Maintenance of higher repo rates to make credit more expensive.
- Other Measures:
- Advising states to allow the free movement of fruits and vegetables by delisting them from the Agricultural Produce Market Committee (APMC) Act.
- Ban on the export of pulses.
- Zero import duty on pulses and onions.
- Empowering States/UTs to impose stock limits on essential commodities like onion, pulses, edible oil, and oilseeds under the Essential Commodities Act.
These measures collectively aim to stabilize prices, enhance the availability of essential goods, and address inflationary pressures in the economy. The government adopts a multi-pronged approach involving fiscal, administrative, and monetary measures to achieve these objectives.
Inflation Risks in 2021:
- Return of Economic Growth:
- Economic recovery can lead to increased demand for goods and services, potentially putting upward pressure on prices.
- Global Crude Prices Rising:
- An increase in global crude oil prices can lead to higher input costs, affecting various sectors and contributing to inflation.
- Rupee Depreciation (In Case of USD Strengthening):
- A depreciation of the Indian rupee, especially if the U.S. dollar strengthens, can lead to higher import costs, affecting overall price levels.
- Higher Minimum Support Prices (MSP) Announced by the Government:
- Increases in MSP by the government can lead to higher production costs, which may be passed on to consumers, contributing to inflation.
- High Fiscal Deficit:
- A high fiscal deficit can lead to increased government spending, potentially fueling demand and contributing to inflationary pressures.
- Supply Side Shocks Due to Agitations:
- Various agitations and disruptions, especially in the supply chain, can lead to shortages of goods, putting upward pressure on prices.
These inflation risks highlight the complex interplay of domestic and global factors that can impact price stability. Policymakers need to carefully navigate these challenges to ensure a balance between economic growth and controlling inflationary pressures. Monitoring and responding to these risks in a timely manner are crucial for maintaining economic stability.
Thalinomics: Understanding the Economics of a Plate of Food in India
Background: “Thalinomics” is a term introduced in the Economic Survey 2020, representing an attempt to quantify the cost of a common plate of food, or “thali,” across various regions in India. The analysis utilized price data from the Consumer Price Index for Industrial Workers (CPI-IW) for approximately 80 centers in 25 States/UTs from April 2006 to October 2019.
Key Findings:
- Change in Dynamics (2015-16):
- The survey identified a change in the dynamics of ‘thali’ prices since 2015-16.
- Affordability Improvement (2006-07 to 2019-20):
- Using the annual earnings of an average industrial worker, the survey found that the affordability of a vegetarian ‘thali’ improved by 29%, while that of a non-vegetarian thali improved by 18% from 2006-07 to 2019-20.
- Impact of Inflation Moderation:
- The moderation in inflation was highlighted as a contributing factor to improved affordability for a common person consuming two thalis a day.
- Reforms Contributing to Change in Thali Prices:
- The survey attributed the change in thali prices to reforms undertaken since 2014-15, aiming to enhance agricultural productivity and improve the efficiency and effectiveness of agricultural markets for transparent price discovery. Schemes like “per drop more crop,” crop insurance, and soil card were mentioned as contributors.
Gaps in the Analysis:
- Limited Wage Linkage:
- The analysis primarily focused on the organized sector, where wages are linked to the Consumer Price Index for Industrial Workers (CPI-IW). However, it didn’t account for the fact that 90% of the workforce does not have wages linked to inflation.
- Inflation Targeting Regime Not Mentioned:
- The introduction of the inflation targeting regime in 2016, through the establishment of a six-member monetary policy committee (MPC), was not explicitly mentioned in the survey.
- Exclusion of Education and Healthcare Prices:
- The survey’s focus on thali prices limited the analysis to food costs, neglecting the steep increase in prices of education and healthcare.
While Thalinomics provides insights into the changing dynamics of food prices, addressing these gaps would lead to a more comprehensive understanding of the economic factors influencing the affordability of a common plate of food in India.
Dosanomics: Balancing Economic Growth and Price Stability
Introduction: Dosanomics is a term coined to describe the economic philosophy that emphasizes achieving high economic growth while maintaining price stability. The concept gained attention when former RBI Governor Raghuram Rajan used the example of the price of dosa to illustrate the relationship between interest rates, inflation, and the well-being of retirees.
Key Principles of Dosanomics:
- Price Stability for Sustainable Growth:
- Dosanomics advocates for price stability as a crucial element for sustainable economic growth. This involves keeping inflation in check to create a favorable environment for investment and consumption.
- Interest Rates and Price Levels:
- The discussion around Dosanomics arose in the context of the central bank’s role in setting interest rates. Rajan argued that retirees, who depend on interest income, should focus on lower prices rather than higher interest rates. Lower interest rates are often associated with price stability.
- Long-Term Economic Welfare:
- Dosanomics emphasizes the medium to long-term benefits of price stability. It posits that a stable price environment encourages improved supplies, enhances the quality of goods, and contributes to overall economic welfare.
- Quality of Goods and Services:
- The example of dosa is symbolic of the broader idea that price stability not only ensures affordability but also encourages improvements in the quality of goods and services available in the economy.
Criticism and Counterarguments:
- Critics argue that lower interest rates can adversely impact retirees who depend on interest income for their sustenance. The debate revolves around finding a balance between supporting economic growth and ensuring the financial well-being of specific segments of the population.
Conclusion: Dosanomics encapsulates the philosophy of achieving robust economic growth without compromising on price stability. The example of dosa serves as a metaphor for understanding the intricate relationship between interest rates, inflation, and the overall economic well-being of the population, especially retirees. It highlights the importance of a nuanced approach to monetary policy that considers the diverse interests and impacts on different segments of society.
FAQs
Q: What steps does the government take to control inflation?
A: The government can use monetary policy tools, such as adjusting interest rates, to control inflation. By increasing interest rates, the government aims to reduce consumer spending and borrowing, which can help decrease demand-pull inflation.
Q: How does fiscal policy contribute to controlling inflation?
A: Fiscal policy involves government spending and taxation. To control inflation, the government can reduce its spending or increase taxes to decrease aggregate demand in the economy. This can help mitigate inflationary pressures.
Q: What role do price controls play in inflation control?
A: Price controls involve setting limits on the prices of goods and services. The government may impose price ceilings to prevent prices from rising too rapidly. However, price controls can also lead to shortages or reduce the incentive for producers to supply goods, so they are often used cautiously.
Q: How does the government address supply-side factors to control inflation?
A: Addressing supply-side factors involves improving productivity, enhancing infrastructure, and removing regulatory barriers to increase the supply of goods and services. By boosting supply, the government can help alleviate cost-push inflationary pressures caused by supply shortages or production inefficiencies.
Q: What is the role of central banks in controlling inflation?
A: Central banks, such as the Federal Reserve in the United States, play a crucial role in controlling inflation through monetary policy. They regulate the money supply and interest rates to achieve price stability. Through open market operations and reserve requirements, central banks influence the availability of credit and liquidity in the economy, thereby impacting inflation levels.
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