Taming inflation in India requires a multifaceted approach that addresses both short-term challenges and long-term structural issues. The immediate focus should be on implementing prudent monetary policies to control the money supply and interest rates. The central bank plays a crucial role in this regard, and close coordination with fiscal authorities is essential to ensure a harmonized policy response. Additionally, enhancing agricultural productivity and supply chain efficiency can mitigate food inflation, a significant contributor to overall price volatility. Simultaneously, investments in education and skill development are imperative for creating a skilled workforce, fostering innovation, and improving productivity across sectors. Structural reforms in sectors like labor and land can further contribute to a more stable economic environment, attracting both domestic and foreign investments. A comprehensive and well-coordinated strategy that combines short-term stabilization measures with long-term reforms is essential to effectively tame inflation and pave the way for sustained economic growth in India.
Tag: GS Paper-3: Growth & Development; Monetary Policy.
Exam view:
Areas of concern; Ban on Export; A better way to tame non-PDS inflation.
Context:
Export bans, stocking limits can be counterproductive to stabilise prices of commodities. India needs to use import policy liberally.
Decoding the editorial: Areas of concern
The June Consumer Price Index (CPI) inflation figure of 4.8 percent is discomforting for the RBI as well as the government.
- The erratic monsoon has raised the risk of inflation.
- The cereals and products inflation is high at 12.71 percent. It contributes about 22.8 percent to CPI inflation, as it has a high weight of 9.7 percent in the food group in the CPI basket.
- The inflation rate for wheat stands at 12.37 percent despite the recent ban on exports and the stocking limits on traders and processors.
- Furthermore, rice inflation stands at 11.78 percent, and the FCI’s open market operations have elicited a lukewarm response.
- Tomato prices are showing a negative inflation of (-) 34.7 percent in June 2023.
- It is because last year in June 2022, tomatoes inflation was 158 percent, and therefore when one compares, year-on-year (YoY) inflation, it turns out to be negative for tomatoes.
- But month-on-month (MoM) (June over May 2023) basis, inflation is 64.5 percent for tomatoes.
- Milk and milk products recorded an inflation rate of 8.56 percent in June 2023 and contributed 11.2 percent to the overall CPI inflation.
- Among the 299 commodities in the CPI basket, liquid milk has the highest contribution of 11 percent to CPI inflation.
- Rising feed costs and lumpy skin disease have led to milk production stagnating (222 MT) in FY23 over (221 MT) in FY22.
- Pulses and products inflation in June 2023 was also at double digits (10.53 percent).
- Regions dependent on rainfall for pulses cultivation, such as Madhya Pradesh, Rajasthan, and Maharashtra, may see a reduced output due to anticipated adverse weather conditions caused by El Nino.
Ban on Export
The government has imposed a ban on exports of white rice with the hope of taming cereal inflation. Its probable impacts are:
- Globally: India is the largest exporter of rice, accounting for almost 40 percent of the global rice trade.
- Such bans on exports and strangulation of domestic markets will not be appreciated at all by G20 countries.
- The rice export ban will hurt the African countries most as rice prices are likely to go up internationally.
- Domestically: It reflects a knee-jerk reaction and a strong pro-consumer bias, which is also anti-farmer.
- These are instruments of the 1960s.
- Export bans and stocking limits also make a mockery of the agri-marketing reforms that the now-withdrawn farm laws were trying to achieve.
- India imposed a ban on wheat exports in May 2022, and in June this year. Yet, inflation in wheat has been in double digits.
- The government is already giving free rice or wheat (5kg/person/month) to more than 800 million people under its PM Garib Kalyan Yojana.
- In the case of rice, the export ban is puzzling as the government has stocks of more than 40 million tonnes (MT) , almost three times the buffer stock norms of 13.5 MT as on July 1.
A better way to tame non-PDS inflation
- Reduce the import duty on wheat from 40 percent.
- Unload excess rice stocks in the open market at lower prices than what the FCI has been doing recently.
- There is also a need to revise the weight of food and beverages in the CPI basket.
- This is outdated and based on the 2011 consumption survey.
- Engel’s law clearly shows us that with rising per capita income, people will spend less on food.
- There needs to be accountability from Operation Green, which was set up to stabilise value chains and prices of tomatoes, onions, and potatoes (TOP).
- With respect to milk products, the policy solution lies in reducing import duties on skimmed milk powder (SMP) from 60 percent to 10 percent and on butter from 40 percent to 10 percent.
- Importing tur from Mozambique, Malawi and Myanmar can help tame tur prices.
- Also, India needs to abolish the minimum import price for yellow peas, which currently stands at Rs 200/kg. Yellow pea is the cheapest pulse; it can act as an anchor and check the spurt in pulses prices.
To sum up, India can contain CPI inflation within 6 percent, provided it uses import policy for food products liberally and well in time.
Source: Indian Express
Frequently Asked Questions (FAQs)
Q: What is inflation and why is it important to tame it?
Inflation refers to the sustained increase in the general price level of goods and services in an economy over time. Taming inflation is crucial because unchecked inflation can erode the purchasing power of a currency, leading to economic instability and negatively impacting consumers, businesses, and overall economic growth.
Q: How does the central bank contribute to taming inflation?
The central bank, such as the Reserve Bank of India, plays a pivotal role in taming inflation through monetary policy. It can adjust interest rates and control the money supply to influence inflation rates. By implementing measures like raising interest rates, the central bank aims to curb excessive spending and lending, thereby controlling inflation.
Q: What role does fiscal policy play in controlling inflation?
Fiscal policy, managed by the government, involves decisions related to taxation and public spending. Coordinated fiscal and monetary policies are essential for effective inflation control. Governments can use fiscal tools to manage demand and address structural issues contributing to inflation, such as investing in infrastructure and implementing targeted subsidies.
Q: How does inflation impact different sectors of the economy?
Inflation affects various sectors differently. While moderate inflation can be a sign of a healthy economy, hyperinflation or rapid price increases can harm businesses by increasing production costs and disrupting consumer spending patterns. Taming inflation is crucial for maintaining a stable economic environment that fosters sustainable growth across sectors.
Q: What are the long-term strategies to address inflation in India?
Long-term strategies to address inflation in India involve structural reforms in areas like agriculture, labor, and land use. Enhancing productivity in agriculture, improving supply chain efficiency, and implementing policies that encourage innovation and skill development are vital components. These reforms contribute to creating a more resilient and competitive economy, reducing the likelihood of inflationary pressures.
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