How not to tame inflation

Source: The post is based on the article “Ashok Gulati, Manish Kumar Prasad write: How not to tame inflation” published in “The Indian express” on 24th July 2023.

Syllabus: GS3- Indian economy (inflation)

News: In this article author discusses India’s rising inflation, particularly in food items like wheat, rice, tomatoes, and milk. The government’s actions, like export bans, aren’t effective. The author suggests adjusting import duties and updating the CPI basket weights as better solutions to control inflation.

What are the reasons for the rising food inflation in India?

1. Seasonal Factors: Erratic monsoon patterns (caused by El Niño), can influence crop yields. Like, tomato prices rose due to seasonal factors.
2. Disease and Feed Costs: Milk production faced challenges from rising feed costs and lumpy skin disease.

3.Reduced Production: Tur inflation soared because of lower acreage and production. Weather conditions might further reduce pulse outputs in regions that depend on rainfall.

Why is an export ban to curb inflation not an effective approach?

Export Bans and Stocking Limits

India banned wheat exports in May 2022 and imposed stocking limits on traders. An export ban was also placed on white rice.

Policymakers are using older strategies from the 1960s, which might not be suitable for current market dynamics. For example, despite the wheat export ban and stocking limits, wheat inflation is at 12.37%. Rice inflation is at 11.78%. These bans might not be favored by G20 countries.

What measures should be taken to address this issue effectively?

1. Adjust Import Duties:

Reduce the import duty on wheat from 40% to 10%.

Decrease import duties on skimmed milk powder from 60% to 10% and butter from 40% to 10%.

By lowering duties, cheaper imports can help control domestic prices.

2. Release Excess Stocks:

The government holds more than 40 million tonnes of rice, much above the buffer stock norms of 13.5 MT.

Unload excess stocks in the open market at lower prices than the current rates.

3. Update the CPI Basket Weights: The current weight for food in the CPI basket is based on a 2011 consumption survey and is outdated. The current weight is 45.9%, it should be around 38% in 2023.
4. Enhance Processing Capacity: Process 10-15% of items like tomatoes and onions to stabilize prices.