Apart From the Foreign Hand

Source: The post is based on an article “Apart from the foreign hand” published in the Times of India on 11^th July 2022.

Syllabus: GS 3 Indian Economy

Relevance: Macroeconomic Conditions; Inflation

News: In recent months, India first offered to export wheat to a hungry world. However, later on, it suddenly reversed its position because the spectre of inflation has been haunting the world, including India.

What are the causes behind high inflation?

Even before Russia invaded Ukraine, OPEC had squeezed supplies of crude oil. This has fuelled the oil prices.

Geopolitical Reasons: It has caused an increase in the prices of oil, other energy products, and food worldwide.

The Russia-Ukraine war further hiked the price of crude spike and other energy prices. For example, the Western countries have imposed sanctions on Russian produce.

Natural gas is not easy to either source or sell. Its transport infrastructure – pipelines, plants, special terminals for LNG tankers, LNG tankers, regasification facilities at import terminals, etc. are limited. It takes time and money to expand.

The West has cut back its purchase of gas and oil from Russia. Now, it is sourcing gas and coal from other sources, which has lifted all energy prices like ethanol.

This has hiked the prices of other commodities. For example, For Ethanol, the corn is diverted, pushing up the prices of chicken feed and chicken.

The West has put a ban on imports of Russian grain, fertiliser, and oilseeds. Russia is one of the largest exporters of wheat to the global wheat markets.

The war has also squeezed the global wheat supplies from Ukraine, which is the fifth-largest wheat exporter.

Implications of inflation

Inflation has a differential impact on different sections. The capitalists receive benefits out of it. For example, when wages and salaries shrink in real terms, the income distribution shifts in favor of gross profits, which means capitalists get more money.

The real cost of servicing debt falls – except when the debt is owed to foreigners. For example, Inflation induces currency depreciation, and a lower rupee increases the cost of servicing dollar debt.

Further, inflation also divides capitalists into two classes.

How is the RBI response correct?

RBI’s approach has been prudent and appropriate. Its decision to not make sharp and pre-emptive interest rate increases is spot on.

The Higher rates squeeze the second-round effects of inflation. For example, when the demand for higher wages and resultant higher wages lead to the spread of the initial price rises to all sectors.

What are the issues in the RBI actions?

Inflation-squeezing rate rises hurt growth. Growth helps the poor, creating new incomes, even as inflation crimps their consumption.

In recent years, the RBI easy money policies have also failed to create excess demand. Inf act, free food has ensured the survival of people.