[Editorial Analysis] Mild moderation

Mains Paper 3: Economy
Prelims level: Consumer Price Index
Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

CONTEXT:

• Consumer Price Index (CPI) which measures retail inflation was estimated to have moderated in November to 6.93%, from the previous month’s 7.61%.

• On the face of it, the moderation in price gains ought to be welcome news.

WHAT IS CONSUMER PRICE INDEX (CPI)?

• When we talk about the rate of inflation, it often refers to the rate of inflation based on the consumer price index (CPI).

• The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.

• It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living.

• To measure inflation, we estimate how much CPI has increased in terms of percentage change over the same period the previous year.

• If prices have fallen, it is known as deflation (negative inflation). The Central Bank (RBI) pays very close attention to this figure in its role of maintaining price stability in the economy.

• The CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.

• Simply put, CPI specifically identifies periods of deflation or inflation for consumers in their day-to-day living expenses.

FACTORS IMPACTING RETAIL INFLATION:

• A key driver for inflation is the monsoons. A good monsoon normally results in a better Kharif crop. A higher Kharif production is dependent on the quantum of the monsoons. In fact, the good monsoon was largely instrumental in the sharp fall in CPI inflation since July 2016. The spread of monsoon and the timely onset of monsoon also have an impact on CPI inflation.

• The base effect is an important factor driving the CPI inflation. The base effect is the distortion in a monthly inflation figure that results from abnormally high or low levels of inflation in the year-ago month. A base effect can make it difficult to accurately assess inflation levels over time. It diminishes over time if inflation levels are relatively constant.

• Perishables are another important determinant of CPI inflation. If the product cannot be sold within the stipulated time, they have to be disposed off through fire-sales. We have seen fire sales of vegetables in many Mandis across India and that largely explains why vegetables have also shown negative inflation in the last 6 months.

• Fuel has a weight of 8% in the overall CPI inflation and hence shifts in fuel costs tend to impact CPI inflation. But the bigger impact is indirect. Fuel becomes an important input for transportation and that is an important constituent of the overall cost structure in the economy.

• Supply bottlenecks are a very important component of CPI inflation. Supply bottlenecks refer to the capacity of the economy to bring food from farm to fork. Traditionally, India has suffered from problems like poor road infrastructure, poor transport facilities, outdated warehousing and cold storage facilities etc. All these contribute to the retail inflation which is why the government is seriously working towards de-bottle necking them.

• A key determinant of CPI inflation will be the direction in which oil dividends flow.

• Imported inflation may be hard to fathom but it is an outcome of a weak rupee. Since India runs a trade deficit of approximately $13 billion per month, a weak rupee can result in imported inflation.

• Government taxes have a very important role to play in the level of inflation. When the landed cost of oil was sharply falling due to weak crude prices, the government increased excise duty on petrol and diesel consistently to prop up its revenues.

• The above factors were all supply driven factors. There is also a demand pull factor with respect to CPI inflation. When the government puts more money in the hands of people through measures like One Rank One Pension and 7th Pay Commission, which can be inflationary. More income leads to more demand among sections of the society that have a high propensity to consume. Similarly, the NREGA and other rural employment guarantee programs have also contributed to CPI inflation.

• To conclude, the retail inflation is likely to continue to be driven by food prices and fuel prices. Food prices will continue to depend on the vagaries of monsoon just as fuel will continue to depend on the vagaries of global equations. For now, the bias seems to be towards lower retail inflation in the months to come.

COMPONENTS IN FOOD AND BEVERAGES BASKET:

• The reason behind the modern in retail inflation is slowing in price gains in the food and beverages basket, which with a weight of almost 46 is the single biggest index constituent and driver of retail inflation.

• Increased market arrivals of vegetables — the third-largest weight within the basket — led to a sharp deceleration in price gains for this key food item.

• Inflation for vegetables slid 688 basis points to 15.63% last month, from 22.51% in October.

• Cereals, the food category with the largest weight, saw inflation slow to 2.32%, from 3.39%, reflecting the bumper kharif harvests and confirming the trend that the central bank had spoken of.

• And though the prices of other food categories too softened in November, out of the basket of 12 items, inflation still remained in the double digits in the case of six, excluding vegetables.

• Key protein sources including pulses, eggs and meat and fish continued to register worryingly high levels of inflation that surely cannot bode well for the wider population’s nutritional well-being.

OTHER COMPONENTS IN CPI:

• Disturbingly, inflation in the key transport and communication category that includes petrol and diesel eased to 11.06%.
• Oil marketing companies are continuing to raise pump prices of these crucial transportation fuels.

• From April’s pandemic-induced lows, as crude oil extends its recovery, it is hard to foresee any further appreciable softening in food prices in December given the high costs of transporting farm produce from the agrarian hinterland.

• This development will put the RBI’s forecast for average fiscal third-quarter inflation of 6.8% in risk.

• RBI’s November survey of households’ inflation expectations also offers little room for comfort.

• Many households are expecting general prices to rise over the ‘next three months’ and ‘one year ahead’ horizons than the number of respondents concerned about such a price trend in the September survey.

• Policymakers must be careful against easing vigilance on prices while considering growth-supportive measures.

CONCLUSION:

• Price stability, for all the growing calls to downplay its centrality in the RBI’s policy mandate, must remain the monetary authority’s primary target: unchecked inflation poses manifold risks to the nascent economic recovery.

• Inflation, if unchecked, can hamper the developing economic recovery.

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Prelims Questions:

Q.1) With reference to the contempt of court, consider the following statements:
1. The Contempt of Courts Act, 1971, lays down the law on contempt of court. Section 15 of the legislation describes the procedure on how a case for contempt of court can be initiated.

2. In the case of the Supreme Court, the Attorney General or the Solicitor General, and in the case of High Courts, the Advocate General, may bring in a motion before the court for initiating a case of criminal contempt.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: C

Mains Questions:

Q.1) Define Consumer Price Index. What are the key factors affecting CPI inflation?

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