The June inflation data based on India’s Consumer Price Index (CPI) reported some respite from the rising trend seen since last September. While overall inflation remained at the same level as in May, there was some moderation in food inflation. However, a closer look at the underlying data across all commodities and the factors behind our inflation spurt shows that any complacency based on the June data may be unwarranted. While overall food inflation may moderate marginally, wheat inflation crossed the 10% mark in June for the first time.
In contrast, inflation based on the Wholesale Price Index (WPI) showed a rise in food inflation to 12.4 per cent, the highest since November 2013. WPI overall inflation remained at 15%, with June being the 15th month of double-digit readings. While the inflation of wheat remained above 10 per cent for the 8th consecutive month, there have been signs of increasing inflation in paddy since February. Clearly, any assessment of our inflation trajectory must also take into account the trends emanating from the WPI.
However, more than conflicting trends from wholesale and retail inflation data, the real cause for concern is domestic and international conditions, which suggest that inflationary pressures are likely to persist. The latest figures from the Food and Agriculture Organization (FAO) show a moderation in grain prices due to seasonal factors, but it is still 28% higher than last year. It also reflects rising prices in the world of dairy products and meat, some of which are also reflected in Indian retail and wholesale prices. In view of the scorching heat in many parts of Europe, there are concerns about the supply of wheat. But even without this, the fact that wheat is becoming costlier despite excess supplies since September confirms the role of speculative finance in driving up prices.
However, it is the domestic front that shows more signs of concern. While wheat production has already been affected due to our unseasonal heat at the beginning of this year, domestic wheat prices have been increasing since long. A policy flip-flop on exports means that total government procurement of 19 million tonnes of wheat this year has been less than half of its average in recent years. The news of paddy is also not pleasing. Despite normal monsoon so far across the country, there is acute shortage in many paddy producing states. According to the latest data, till July 15, paddy was sown at just 12.85 lakh hectares, compared to 15.55 lakh hectares last year. Considering that our paddy sowing season is almost over, this 18% drop in sowing is likely to reduce the supply of rice. With signs of rising rice prices, the next big challenge could be the mark-up induced inflation of rice. Adding to our concerns, the recent imposition of GST on food products including packaged cereals will further push up prices.
Clearly, any expectation of a quick reduction in inflation is misplaced. Given the multiplicity of factors, monetary policy alone is unlikely to be of much help in controlling this. This helps when inflation is driven by higher demand, but this is not the case in India right now. Excessive reliance on monetary policy can have negative consequences of slowing down our economy, although it is already suffering from recession and pandemic disruptions. In any case, monetary policy is unlikely to be effective on food inflation, for which supply-side concerns are the major driver.
A depreciating rupee on primary cereals and supply concerns have added to the fears of prolonged inflation. The challenge for the government is not only to control inflation, but also to protect the people, especially those at the lower levels of our income distribution, from the adverse consequences of rising prices. Fortunately, we already have a mechanism in place to protect the poor from high food prices. The additional foodgrains provided as part of the Pradhan Mantri Garib Kalyan Yojana (PMGKY) has played an important role during the last two years with the existing entitlements under the National Food Security Act. While extending PMGKY for another six months beyond September will help most of India’s poor and vulnerable, the Center may also need to extend procurement operations for higher allocation of food grains. State procurement at higher Minimum Support Price (MSP) is likely to help Indian farmers in severe rain-deficit areas. Given the complexity of the factors that drive inflation, the best way to save the Indian economy is by prioritizing the primary task of ensuring food security to citizens and protecting lives and livelihoods.
Himanshu is Associate Professor at Jawaharlal Nehru University and Visiting Fellow at Center de Sciences Humanes, New Delhi
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