The government should prepare for a sustained spell of inflation

News: Inflation data based on the consumer price index (CPI) released this week suggest that, inflation has decreased compared to the previous months.

This may be good news for the Reserve Bank of India, but any complacency would not only be premature, it could also create challenges for an economic recovery.

Why India should not get complacent wrt inflation?

Inflation based on the wholesale price index (WPI) is still high: It was at 12.5% in October. This is the seventh month that this measure has been in double digits. Unlike CPI inflation, it hasn’t shown any pattern of reduction. Moreover, wholesale food inflation has declined much slower than the retail.

Prices of cereals and edible oils have started rising: The FAO index has reported faster inflation for cereals and edible oils. It is due to increase in oil prices. Increasing oil prices result in higher demand for grains that can be used for ethanol production. The spill-over effect of these is felt on other food grains.

Supply shocks in the global market: Supply bottlenecks and adverse weather concerns have also prompted countries to hoard grain stocks, causing supply issues in the global market.

Increasing domestic demand: economic activity returning to normal would drive inflation.

Likelihood of Food inflation due to increase in input costs in the agricultural sector. Diesel and electricity prices have increased sharply, while a rise in fertilizer prices along with increasing wages has further pushed up the cost of cultivation.

What challenges/issues this type of inflation presents?

The nature and persistence of this type of inflation is what makes it worrisome. Because there are very few options of controlling it.

– Monetary policy is unlikely to be of any help. Global price movements may be beyond the control of domestic policy. Moreover, any attempt to control inflation for consumers would likely hurt the agrarian economy, which has been in distress for the past five years

– Also, on the other hand, falling casual wages, lack of employment opportunities and dearer essentials have worsened many human development indicators, nutritional outcomes included.

This poses multiple challenges for the government.

Government has to control inflationary pressures while protecting the real incomes of the poor, at the same time it has to ensure that the cost of this exercise is not borne by farmers.

What is the way forward?

First, Government has to use public expenditure to protect the profitability of farming by enhancing subsidies and access to essential inputs.

Second, Government can expand the public distribution system (PDS) through universalization and an expansion of entitlements, such as the addition of pulses and edible oils to the PDS basket.

Third, the above strategies should be supplemented with the reopening of schools and anganwadis everywhere and enlarged access for children and pregnant women to food schemes.

Source: This post is based on the article “The government should prepare for a sustained spell of inflation” published in Live Mint on 19th Nov 2021.