How Not To Tame Inflation

Relevance: GS3- Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. , Major crops-cropping patterns in various parts of the country, - different types of irrigation and irrigation systems storage, transport and marketing of agricultural produce and issues and related constraints; e-technology in the aid of farmers. Issues related to direct and indirect farm subsidies and minimum support prices; Public Distribution System- objectives, functioning, limitations, revamping; issues of buffer stocks and food security; Technology missions; economics of animal-rearing.

(Source: Indian Express, 07/24/2023)

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Why in the news?

• The authors have discussed the inflation in prices of food commodities in India and strategies to counter it in the article titled “How Not To Tame Inflation” published in the Indian Express on July 24th, 2023.
• Inflation as per the Consumer Price Index June 2023 is around 4.8% as food inflation rose from 2.96% to 4.49%.

What has the government done to control cereal inflation?

• The government has imposed a ban on the export of white rice in order to control cereal inflation.
• In May 2022 and June 2023, India imposed a ban on the export of wheat.
  • It also imposed limits on the stocks that could be held by traders and processors.

Has it been effective?

• Despite the imposition of export bans and stock limits, wheat and rice inflation have risen to 12.37% and 11.78% respectively.
• Inflation in cereals and products, which contributes around 22.8% to CPI inflation, has risen to 12.71%.
  • It has a weight of 9.7% in the food group in the CPI basket.

How has the government’s approach been criticized?

• Anti-farmer: The government’s strategies are seen as a knee-jerk reaction, with a strong pro-consumer bias and anti-farmer tendency.
  • They are interpreted as non-compliant with the principles of the now repealed Farm laws.
• Global impact: The ban on exports and the restrictions imposed on domestic markets will adversely affect the G20 countries.
  • It may cause the price of rice exports to increase internationally as India is the largest exporter of rice supplying 40% of the global rice trade.
• Stocks: The government has stocks of more than 40 million tonnes (MT) of rice, almost three times the buffer stock norms of 13.5 MT, and is distributing 5kg of rice or wheat to 800 million people under the PM Garib Kalyan Yojana.
  • A part of the excess stock could have been exported to help control price fluctuations and compensate farmers.

What strategies have been suggested for various food commodities?

• Revise weightage in CPI: Revise the weight of food and beverages in the CPI basket, which is based on the 2011 consumption survey, from the present 45.9% to 38% and for food from 39% to 33%.
• According to Engel’s law, with rising per capita income, expenditure on food will decrease.
• Therefore, the weight of food products in the CPI basket must be corrected to prevent overestimation.
• Rice and Wheat: Reduce the import duty on wheat from 40% to 10%.
• Dispose of excess rice stocks in the open market at prices below the FCI price
• Onions and Tomatoes: In the medium term, at least 10 to 15% of items like tomatoes and onions, whose prices fluctuate heavily, need to be processed to stabilize their prices.
• Tomato prices displayed year-on-year inflation of -34.7% in June 2023, and month-on-month inflation of 64.5%.
• Milk and milk products: Reducing import duties on skimmed milk powder (SMP) from 60% to 10% and butter from 40% to 10%.
• In the medium to long run, the government should enhance the quality of fodder supplies and raise the productivity of milch animals.
• Inflation in milk and milk products was 8.56% in June 2023, contributing 11.2% to overall CPI inflation.
• Of all the CPI commodities, milk contributes the most to CPI inflation (11%).
• Milk production has stagnated at 222 MT in FY 2023 on account of the occurrence of lumpy skin disease and the increase in feed costs.
• Pulses: Increase the imports of tur dal from exporters such as Mozambique, Myanmar, and Malawi in order to control prices and abolish the import price for yellow peas which helps restrict inflation in pulses.
• Inflation in pulses was 10.53% in June 2023 while tur recorded inflation rates of 27.5% due to the lower rate of production and acreage.
• Pulse cultivation, in rainfed regions such as Madhya Pradesh, Rajasthan, and Maharashtra, may decline due to the projected adverse weather conditions due to the El Nino season.

Conclusion

• India can contain CPI inflation to under 6% provided it implements a timely and liberal import policy for food commodities.
• Strategies that were popular in the 1960’s such as stock limits and exports are not likely to succeed in controlling inflation in the present scenario.

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FAQs

MCQs

Question: Consider the following statements:

1. Inflation is the rise in the price of goods and services.
2. The purchasing power of a currency increases along with inflation.
3. Demand-pull inflation refers to the decrease in the aggregate supply of goods and services.

How many of the above statements are correct?

(a) Only 1

(b) Only 2

(c) All 3

(d) None