With Russia-Ukraine conflict, comes inflation challenge

News: With the Russia-Ukraine conflict going into a war, global commodity prices, especially that of crude oil and gas, are likely to see a strong surge. This poses a challenge for India and the world to contain inflationary pressures.

How does the Russia Ukraine conflict affect the economy?

At 6%, India’s consumer price index (CPI) inflation crossed the upper limit of RBI’s tolerance band in January 2022. The wholesale price index (WPI) is rushing at more than double that rate (12.96%). In the US, inflation is at 7.5 %, which is almost a 40-year-high. Economists also believe that the Federal Reserve will not able to curb inflation soon.

High inflation imposes a large “inflation tax” on the public, with bank savings that earn an interest of less than 1%. India is also affected by this tendency. Most of the major banks, including the State Bank of India, offer interest rates between 3-4% to depositors. With CPI inflation at 6% and WPI inflation at 13%, Indian depositors are losing the real value of their money because of this hidden “inflation tax”.

Even, the upper limit of RBI’s tolerance band is biased against depositors and is in favour of entrepreneurs. The inflation rate must be below 3 percent, which must ensure positive real rates of interest.

How can India ensure lower rates of inflation?

There is a need to control food inflation as food has a weight of more than 45% in CPI in India. India imports roughly 60% of its consumption of edible oils. Global prices of edible oils have gone up by more than 50% over the last year. To control inflation, the Centre has imposed stock limits on traders and lowered import duties, and imported more pulses. It also imposed stocking limits on domestic oil/oilseed traders.

The Center can further control food inflation by unloading the excess grain in the open market. FCI could help in bringing down food inflation substantially as rice and wheat have a high weightage in CPI.

Adopting the growth-oriented policy: It has been seen that political party promises freebies before elections. They promise loan waivers and free power to farmers, unemployment allowances to the youth, and income support to women, laptops, smartphones, etc. This amounts to misusing taxpayers’ money to get into power. There is a need to stop this competitive populism to make the Indian policy-making growth-oriented.

Reform in grain-management-cum-food-subsidy system: There is a need to bring reforms in this system. This should be combined with raising productivity and producing more nutritious food while protecting the environment.

Source: This post is based on the article “With Russia-Ukraine conflict, comes inflation challenge” published in the Indian Express on 28th February 2022.