{"id":289822,"date":"2024-04-08T19:00:52","date_gmt":"2024-04-08T13:30:52","guid":{"rendered":"https:\/\/forumias.com\/blog\/?p=289822"},"modified":"2024-06-28T14:39:26","modified_gmt":"2024-06-28T09:09:26","slug":"inflation-in-india-reasons-and-solutions-explained-pointwise","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/inflation-in-india-reasons-and-solutions-explained-pointwise\/","title":{"rendered":"Inflation In India- Reasons and Solutions- Explained Pointwise"},"content":{"rendered":"

Recently, the Reserve Bank of India Monetary Policy Committee (MPC) has released the projection of retail Inflation in India for FY 25<\/span>. RBI’s MPC projects Inflation in India to be 4.9%<\/span> in Q1<\/span>, 3.8%<\/span> in Q2<\/span>, 4.6%<\/span> in Q3<\/span> and 4.5%<\/span> in Q4<\/span> of FY25<\/span>. Inflation in India is now showing decreasing trend, after its upsurge in the aftermath of the COVID-19 pandemic and Russia’s invasion in Ukraine.<\/p>\n

However, the retail food inflation in India has been posing challenges<\/span> for the final descent of inflation to the target of 4%<\/span>. But there is hope, for softening of food inflation softening in the months ahead, due to easing global food prices<\/span> and the onset of La Nina in India<\/span>. This would provide the much needed leeway for the MPC to consider cutting the central bank\u2019s benchmark interest rates.<\/p>\n

\"Inflation
Created By Forum IAS<\/figcaption><\/figure>\n\n\n\n\n
Table of Content<\/strong><\/td>\n<\/tr>\n
What is Inflation? What are its different types?<\/a>
\nWhat are the reasons behind the recently Increasing Inflation in India?<\/a>
\nWhat are the impacts of Inflation in India?<\/a>
\nWhat are the measures employed in India to control inflation?<\/a>
\nWhat are the challenges with Inflation Management in India?<\/a>
\nWhat should be the solutions for reducing inflation?<\/a><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

<\/a>What is Inflation? What are its different types?<\/span><\/strong><\/h2>\n

Inflation-<\/strong>\u00a0Inflation refers to the rise in the prices of most goods and services of daily or common use<\/span> such as food, clothing, housing, recreation, transport, consumer goods. Inflation measures the average price change in a basket of commodities and services<\/span> over a period of time.<\/p>\n

Types of Inflation<\/strong><\/p>\n\n\n\n\n\n
Demand Side inflation<\/strong><\/td>\nDemand Side Inflation is caused by high demand and low production<\/span> which creates a demand-supply gap<\/span> and it leads to a hike in prices due to increase in consumption.<\/td>\n<\/tr>\n
Cost Pull inflation<\/strong><\/td>\nCost Pull Inflation is caused by shortage of factors of production like labour, land, capital<\/span> etc. and also due to artificial scarcity created due to hoarding<\/span>.<\/td>\n<\/tr>\n
Built-in inflation<\/strong><\/td>\nDue to the emergence of cost-push inflation and demand-pull inflation, employers need to offer competitive wages to avoid the risk of labour shortages. Companies resort to built-in inflation in these cases, which involves raising employee salaries<\/span> while increasing prices to maintain profit margins.<\/span><\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Different Inflation indices used in India<\/strong><\/p>\n

WPI Inflation-<\/strong> WPI captures the average movement of wholesale prices of goods only<\/span>. Its major components are- Manufactured goods (64.23%) > Primary articles (22.62%)> Fuel and Power (13.15%). It is primarily used for ascertaining GDP Deflator<\/span> in the economy.<\/p>\n

CPI Inflation-<\/strong> CPI captures the movement in prices of goods and services<\/span> that are acquired by the households for consumption purposes. Its major components are- Food and Beverages (45.86%) >Housing (10.07%)> Transport and communication (8.59%)> Fuel and Light (6.84%). It is primarily used for RBI\u2019s Inflation targeting<\/span> and measurement of DA<\/span> for employees.<\/p>\n\n\n\n
Headline and Core Inflation
\nHeadline Inflation- <\/strong>Headline inflation is a measure of the total inflation<\/span> within an economy, including commodities such as food and energy prices<\/span>, which tend to be much more volatile and prone to inflationary spikes. The headline inflation is reported through<\/span> the Consumer Price Index<\/span> (CPI<\/span>) in India.
\nCore Inflation- <\/strong>Core inflation is the persistent component of inflation in India<\/span>. It attempts to remove the volatile, transitory movements from the CPI. In India, it is measured by removing Food and Fuel categories from CPI<\/span>.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Inflation Targeting in India<\/strong><\/p>\n

The Reserve Bank of India<\/strong>\u00a0is the authority to control inflation under\u00a0RBI Act 1934.
\n<\/strong><\/p>\n\n\n\n\n
Inflation Targeting Regime of RBI\u00a0<\/strong><\/td>\n<\/tr>\n
Began in 2016<\/strong>. Central govt fixes the target for\u00a0RBI\u2019s Monetary Policy Committee for 5 years.<\/strong><\/td>\nRBI has to retain the inflation target of\u00a04%, with a tolerance band of +\/- 2 percentage till March 2026.<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

<\/a>What are the reasons behind the recently Increasing Inflation in India?<\/strong><\/span><\/h2>\n

1. Decreased food production due to erratic weather-<\/strong> The prices of food commodities has increased, on account of decreased production due to deficient monsoon<\/span> and unseasonal rains<\/span>. This had caused a spike in the prices of wheat, rice, pulses, vegetables and edible oils.<\/p>\n

2. Increasing cost of agricultural inputs-<\/strong> The increase in the cost of inputs such as seeds<\/span>, fertilizers<\/span>, and labour<\/span> has raised the production costs for farmers in India. This, in turn, has led to higher prices for cereals and pulses<\/span>.<\/p>\n

3. Increase in Global Fuel prices-<\/strong> India has import dependency of around 80% for its fuel demands. For ex-<\/strong> A $10 increase in crude oil price increases inflation in India by 40-60 bps.<\/p>\n

4. Geopolitical Conflicts and tensions-<\/strong> The Russia-Ukraine crisis<\/span>\u00a0 and Israel-Hamas wars<\/span> have resulted in the increase of crude oil prices and have contributed to soaring food and commodity prices (wheat and sunflower oil) .<\/p>\n

5. Impact of COVID-19 pandemic-<\/strong> COVID-induced lockdowns<\/span> caused supply chain disruptions<\/span> across the world, pushing up the commodity prices. Post COVID economic rebound<\/span> led to a drastic increase in demand for goods causing demand pull inflation<\/span> in India.<\/p>\n

6. Lack of Government Interventions-<\/strong> The lackadaisical approach government in actively controlling prices of the essential commodities like lax action on hoarders and stockpilers and exports at prices lower than MSP<\/span> (N<\/span><\/span>on-basmati rice exports surged from 1.38 MT in 2019-20 to 6.4 MT in 2022-23, at prices lower than (MSP), causing high food inflation).<\/p>\n

<\/a>What are the impacts of Inflation in India?<\/strong><\/span><\/h2>\n

Moderate inflation in the range of 4%+\/- 2%, has its positive impacts on the economy-<\/strong><\/span><\/p>\n

1. Increased economic growth-<\/strong> Increasing prices encourages consumers to spend and invest<\/span>, which gives a boost to the economy and job creation.<\/p>\n

2. Higher Profits and Boost to production-<\/strong> Inflation is advantageous to product manufacturers as it enables them to make more money because of Increased Prices<\/span>. This also boosts to the production of more goods and services.<\/p>\n

3. Better returns to the investors-<\/strong> Entrepreneurs and investors get better returns on investments made in profitable ventures<\/span> during periods of inflation.<\/p>\n

4. Increase in worker’s wages- <\/strong>Inflation results in increased wages for the workers as they need more money<\/span> to keep up with rising costs of products.<\/p>\n

5. Reduction in debt burden-<\/strong> Inflation reduces the real burden of debt<\/span> as the amount of money owed remains constant while the value of money decreases over time. This is particularly helpful for borrowers who are struggling to repay their debts.<\/p>\n

However, high and soaring inflation rates (6% or more in India) has seriously negative impacts on the economy-<\/strong><\/span><\/p>\n

1.<\/strong> Inflation tax-<\/b> High rate of Inflation erodes the purchasing power of money<\/span>. People can buy less with the same amount of money, resulting in decreased standard of living.<\/p>\n

2. Exacerbates socio-economic inequality-<\/strong> High inflation rates disproportionately impacts<\/span> the poor<\/span>, unemployed<\/span>, people with fixed incomes<\/span> and retired workers<\/span>.<\/p>\n

3. Reduced economic activities-<\/strong>\u00a0 High inflation increases the economic and financial uncertainties by resulting in increased borrowing cost of businesses<\/span>(as RBI increases Repo rate).<\/span><\/p>\n

4. Reduced international competitiveness-<\/strong> High Inflation makes a country\u2019s goods and services more expensive relative to other countries<\/span>, thereby reducing its international competitiveness.<\/p>\n

5. Currency depreciation-<\/strong> Inflation in India leads to depreciation of currency<\/span> which can impact economic stability.<\/p>\n

<\/a>What are the measures employed in India to control inflation?<\/strong><\/span><\/h2>\n

Inflation management is a complex task<\/span> as inflation is caused by several factors such as demand-pull factors, cost push factors and structural factors. Therefore a mix of macro-economic policies<\/span> are needed to manage the inflation in the economy.<\/p>\n\n\n\n\n\n\n\n\n\n
Main Tools For Inflation Management<\/strong><\/td>\n<\/tr>\n
Monetary Policy<\/strong><\/td>\nMonetary Policy tool is\u00a0employed by the RBI<\/strong>\u00a0to control the supply of money in the economy. RBI applies the repo rate to control the supply of money in the economy. By\u00a0increasing the repo rate RBI tries to bring down the rate of inflation<\/strong>\u00a0in the economy.<\/td>\n<\/tr>\n
Fiscal Policy<\/strong><\/td>\nFiscal Policy tool is\u00a0employed by the Govt\u00a0<\/strong>manage inflation through public expenditure and taxation. Government tries to reduce inflation by\u00a0raising the tax rates and reducing public expenditure<\/strong>.<\/td>\n<\/tr>\n
Other tools for Inflation Management<\/strong><\/td>\n<\/tr>\n
Export policy<\/strong><\/td>\nThe government can temporarily\u00a0ban the export\u00a0<\/strong>and\u00a0imposes Minimum Export Price (MIP)<\/strong> to discourage exports of certain commodities to ensure their availability in the domestic markets.\u00a0Ex-Recent rice export and onion export ban.<\/strong><\/td>\n<\/tr>\n
Price control Policy<\/strong><\/td>\nUnder the\u00a0Essential Commodity Act 1955<\/strong>, the government can declare a commodity as an essential commodity to ensure supplies to people at fair prices.<\/td>\n<\/tr>\n
Anti-Hoarding and Anti-speculation Policy<\/strong><\/td>\nThe Prevention of Black Marketing and Maintenance of Supplies of Essential Commodities Act, 1980<\/strong>\u00a0allows for detention of persons engaged in activities like hoarding, creating artificial scarcities of essential commodities in the market and rigging up of the prices.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

<\/a>What are the challenges with Inflation Management in India?<\/strong><\/span><\/h2>\n

1. Rising Food Prices-<\/strong>\u00a0India\u2019s\u00a0food and oil components\u00a0<\/span>of the consumer price index CPI are\u00a0about 50%.<\/span> The RBI has no control over the prices of food and oil<\/span>, as these are driven by natural climatic factors as well as global uncertainties like Ukraine-Russia war. Therefore, it is left to squeeze less than 50% of the domestic economy to lower inflation.<\/p>\n

2. Govt Failure in addressing supply shocks- <\/strong>Govt’s myopic policies of export ban of agricultural products<\/span> (like wheat<\/span>, rice<\/span>, onions<\/span>) induces fear and panic in the domestic market, leading to rise in stock holdings which ultimately resulted in price rise.<\/p>\n

3. Monetary Policy’s singular focus on demand side- <\/strong>RBI\u2019s monetary policy\u00a0targets only demand constraints<\/span>. It faces the problem of tackling Supply shocks originating from food and oil.<\/p>\n

4.<\/strong> Flawed Model of Inflation targeting-\u00a0<\/strong>The current model of Inflation targeting is based on the assumption that inflation means overheating of the economy<\/span>-that is increased output greater than natural level output. However, In India it is impossible to observe the actual level of output in an economy<\/span>. Hence, setting policy rates based on the assumption that the economy has overheated is unscientific.<\/p>\n\n\n\n
Read More- Inflation Management in India-Present Challenges- Explained Pointwise<\/a><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

<\/a>What should be the solutions for reducing inflation?<\/strong><\/span><\/h2>\n

1. Implementing Farm Reforms-<\/strong> Farm reforms which aim to raise agricultural production and productivity<\/span> must be implemented at the earliest. Also, measures to enhance the processing of perishables like Onion and tomato must be undertaken.<\/p>\n

2. Adjustment of Import Duties-<\/strong>\u00a0Import duties on items like wheat should be reduced as\u00a0cheaper imports <\/span>can help control domestic prices.<\/p>\n

3. Release Excess Buffer Stocks-<\/strong>\u00a0The government holds more than 40 million tonnes of rice<\/span>, much above the\u00a0buffer stock norms\u00a0<\/span>of 13.5 MT. This excess stock<\/span> should be unloaded by Food Corporation of India<\/span> in the open market at reasonable prices. This will cool down the food inflation.<\/p>\n

4. Reduced dependence on fuels-<\/strong> We must aim to increase our renewable energy share in energy mix<\/span> at the earliest, so as to reduce the burden on imported fuels, which induce price volatility.<\/p>\n

5. Updation of the CPI Basket Weights-<\/strong> The weight of food and beverages in the CPI basket should be adjusted<\/span> to reflect current realities as the weights are based on the 2011 consumption survey.<\/p>\n\n\n\n
Read More- The Indian Express<\/a>
\nUPSC Syllabus- GS 3- Indian Economy- Inflation and its management<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n","protected":false},"excerpt":{"rendered":"

Recently, the Reserve Bank of India Monetary Policy Committee (MPC) has released the projection of retail Inflation in India for FY 25. RBI’s MPC projects Inflation in India to be 4.9% in Q1, 3.8% in Q2, 4.6% in Q3 and 4.5% in Q4 of FY25. Inflation in India is now showing decreasing trend, after its… Continue reading Inflation In India- Reasons and Solutions- Explained Pointwise<\/span><\/a><\/p>\n","protected":false},"author":10357,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[130,1],"tags":[],"class_list":["post-289822","post","type-post","status-publish","format-standard","hentry","category-7-pm","category-uncategorized","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/289822","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10357"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=289822"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/289822\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=289822"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=289822"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=289822"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}