India’s Retail Inflation

India’s Retail Inflation

News: India’s retail inflation rate surged to a 15- month high of 7.44 percent in July 2023, primarily driven by a rise in prices of vegetables, cereals, pulses, spices and milk and products, as per data released by NSSO.

Background:
• This is the 3rd instance of retail inflation rate crossing the upper limit of the +4/- 2 percent band of RBI’s medium term inflation target in this calendar year and seventh instance since July 2022.

What is Retail inflation?
• Retail inflation is a measure of how much the prices of goods and services that consumers buy have changed over time. It is calculated using the Consumer Price Index (CPI), which is an index that tracks the changes in the prices of a fixed basket of items that represent the average consumption of households.

What are the reasons for the recent inflationary trend?
• Weight of Food and Beverages is 45.86% of the overall consumer price index (CPI). This is outdated and based on 2011 consumption survey. This needs to be updated as old weights may overestimate the CPI inflation.
• Erratic monsoons over the past months attributed to a steeper-than-expected surge in the prices of vegetables (tomatoes and cereals). As seen by the Food and beverage inflation which rose to 10.57 per cent during the July month from 4.6 per cent in the previous month.
• Milk production has faced challenges from rising feed costs and lumpy skin disease.
• Pulses production especially Tur soared due to lower acreage and numbers might worsen depending on availability of rainfall.

What are the policy options available for Government to combat inflation?
• Monetary Policy - Limiting the money supply may help reduce inflation since the money supply and inflation are closely linked.
• Fiscal Policy - The government can manage inflation through public expenditure and taxation. For example, the government can raise tax rates to contain inflation The government may also reduce public expenditure when inflation is high.
• Under the Essential Commodity Act 1955, the government can declare a commodity as an essential commodity to ensure supplies to people at fair prices.
• The government can temporarily ban export of certain items (as done in case of wheat) to improve their supply in domestic market. Similarly, Minimum export price can be imposed to discourage export of commodities. Allowing for duty free imports can also be taken up to improve domestic supply.
• Keeping a check on hoarding and black marketing of certain food commodities plus option of ban on futures trading of commodities is also available.

What other options can government use?
• The government holds more than 40 million tonnes of rice, much above the buffer stock norms of 13.5 MT. This excess stock should be unloaded by Food Corporation of India in the open market at reasonable prices.
• Import duties on items like wheat should be reduced as cheaper imports can help control domestic prices.
• CPI Weight baskets need to be updated based on current market realities
• Processing of perishable food commodities such as tomato, onions into powder/paste should be carried out to help stabilize prices during periods of inflationary trends.