THE ESSENCE OF INDIA’S INFLATION PROBLEM

THE CONTEXT: The Economic Survey preceding this year’s Union Budget suggests removing food prices from the Reserve Bank of India’s inflation target, shifting focus from ‘headline’ to ‘core’ inflation. This proposal is contentious given India’s high food price inflation and the significant share of food in the consumer price index, which impacts a large portion of the population.

THE ISSUES:

• High Food Price Inflation: Food price inflation in India has been significantly high, with a year-on-year increase close to 10% as of June. This trend has been consistent since 2019, indicating domestic factors at play, and not just external factors like the COVID-19 pandemic or the Ukraine war.
• Inflation Targeting by RBI: The Reserve Bank of India (RBI) has been tasked with controlling inflation through interest rate variations since 2016. However, it has consistently missed the targeted 4% inflation rate over the past five years. This raises questions about the effectiveness of inflation targeting as a strategy.
• Core vs. Headline Inflation: The suggestion to target core inflation (excluding food prices) instead of headline inflation is critiqued. Core inflation has rarely been within the targeted 4% over the past 13 years, and food prices significantly influence core inflation due to their impact on wages and production costs.
• Economic Policy Implications: Removing food prices from the inflation target is seen as ignoring a critical aspect of the Indian economy, where food accounts for nearly 50% of household expenditure. This could adversely affect a large section of the population, particularly the poor.
• Supply-Side Management: Inflation in India, driven by rising food prices, can only be effectively managed through supply-side measures that increase agricultural yield. This requires a comprehensive approach to agricultural production to keep costs in check and ensure steady supply.
• Welfare and Economic Impact: The Economic Survey suggests that income transfers could mitigate the adverse effects of food price inflation. However, if food prices continue to rise faster than overall inflation, such transfers could consume a larger share of the budget, reducing funds available for public goods.

THE WAY FORWARD:

• Strengthening Supply Chain Infrastructure: According to the National Centre for Cold-chain Development, India loses about 15-20% of its perishable produce due to inadequate cold storage and transportation. The Amul dairy cooperative has successfully implemented cold chain logistics to maintain the quality of its products from production to retail.
• Digital Platforms: Platforms like eNAM (National Agriculture Market) can help farmers access wider markets and get better prices for their produce. A study by the Indian Council for Research on International Economic Relations (ICRIER) found that eNAM has helped reduce price volatility for farmers.
• Precision Agriculture: Technologies such as satellite imagery and IoT devices can optimize resource use and increase yields. The Precision Agriculture Development Centre (PADC) has demonstrated yield increases of up to 30% in pilot projects.
• Price Monitoring and Regulation: The government can utilize a Price Stabilization Fund to buffer against price spikes in essential commodities. This fund was effectively used to stabilize onion prices in 2019. Implementing a real-time price monitoring system can help detect and address price anomalies quickly. The Ministry of Consumer Affairs has initiated pilot projects in this area.
• Agricultural Diversification: The Rashtriya Krishi Vikas Yojana (RKVY) encourages farmers to diversify crops, reducing reliance on a few staples. This approach has been successful in states like Punjab, where farmers have diversified into horticulture. Integrating livestock, poultry, and fish farming with traditional agriculture can provide additional income streams and reduce risk. The M.S. Swaminathan Research Foundation has demonstrated the success of such systems in Tamil Nadu.
• Building Climate Resilience: Developing and promoting climate-resilient crop varieties can help mitigate the impact of climate change. The International Crops Research Institute for the Semi-Arid Tropics (ICRISAT) has developed drought-resistant millet varieties that have been adopted in arid regions.
• Focus on Oilseeds and Pulses: Increasing domestic production of oilseeds and pulses can reduce import dependency and stabilize prices. The National Mission on Oilseeds and Oil Palm (NMOOP) aims to increase oilseed production through improved seed distribution and farmer training.
• Strategic Imports: Leveraging international markets to import essential commodities during domestic shortages can help stabilize prices. India’s import of pulses from Myanmar and Canada during domestic shortages is an example. Engaging in trade agreements that ensure stable import prices for essential commodities can provide a buffer against global price volatility.

THE CONCLUSION:

Excluding food prices from the inflation target could neglect the welfare of many Indians, as food inflation significantly affects the overall inflation rate. Effective inflation control in India requires addressing agricultural production and supply-side issues, rather than altering the inflation targeting framework.

UPSC PAST YEAR QUESTION:

Q. Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. 2019

MAINS PRACTICE QUESTION:

Q. Evaluate the potential impact of excluding food prices from the inflation targeting framework in India.

SOURCE:

https://www.thehindu.com/opinion/lead/the-essence-of-indias-inflation-problem/article68533823.ece