The Indian consumer will have to spend more for a little longer

News: In April 2022, the consumer price index-based inflation for food had reached 8.4%. This implies that the gap between wholesale and retail food inflation has been narrowing, suggesting a higher pass-through of input costs.

Situation of Inflation

Around 40% of overall consumer spending is on food. Its purchase frequency is also higher. Thus, food witnessed a higher impact on inflation expectations.

The headline inflation started picking up for imported commodities. For example, edible oils and cereals.  Now, domestically produced items are getting caught in the price fire.

What are the causes of concern?

The average food inflation, of 6% in the past three years, is significantly higher than the pre-pandemic five-year average of 3.5%.

The driving forces behind current inflation are exogenous. Further, their impact will become worse when domestic demand improves.

There is little that monetary and fiscal policies can do to soften the primary exogenous blow in the short-term.

The frequency of purchase, rather than the share of expenditure, shapes inflation-related expectations of consumers.

Why is food inflation surging?

Proximate Causes

There are three reasons: (1) a surge in transportation costs; (2) rising cost of production; and (3) elevated global food prices.

Ultimate Causes

The Russia-Ukraine war is a cause of concern. It is affecting everything, including the food prices.

A sharp rise in transportation costs has pushed up retail prices of agricultural commodities like vegetables,

The domestically produced commodities such as wheat and products, coarse cereals, and meat are witnessing inflation due to a low base and a sequential price rise in these components.

The food production costs have risen also due to increase in fertiliser, pesticides and also animal feed prices.

Impact of the inflation

Rising food inflation hurts consumers a lot more than inflation in other commodities since households do not have much discretion in altering food consumption.

The consequences are more adverse for the rural population which spends a higher share (around 47%) than the urban (roughly 30%) on food; and the bottom 20% of the population which spend out a higher share (60%) on food consumption.

Measures Taken by the government

The Monetary policy has seen hiking of the repo rate, the cash reserve ratio and gradually winding down the easy liquidity situation.

On the fiscal policy front, the government has reduced excise duties on petrol and diesel, increased fertiliser and cooking gas subsidies, and allowing duty-free imports of edible oils.

Way Forward

The RBI is expected to raise repo rates by another 75-100 basis points in the rest of this fiscal.

The pressure on prices of agricultural commodities will take time to soften. Therefore, the government can go for extending the Pradhan Mantri Garib Kalyan Anna Yojana beyond the stipulated period.

Source: The post is based on an article “The Indian Consumer will have to spend more for a little longer” published in the “The Hindu” on 27^th May 2022.