Home / Opinion / Views /  The battle against inflation isn’t won yet

Inflation data for June based on India’s consumer price index (CPI) reported some respite from the increasing trend seen since last September. While overall inflation remained at the same level as May, there was some moderation in food inflation. However, a close look at the underlying data across commodities and the factors behind our inflationary surge suggest that any complacency based on the June data may be unwarranted. While overall food inflation may have moderated marginally, wheat inflation for the first time breached the 10% mark in June.

As against this, inflation based on the wholesale price index (WPI) showed an increase in food inflation to 12.4%, the highest since November 2013. WPI overall inflation remained at 15%, with June being the 15th month of double-digit readings. While wheat inflation was more than 10% for the 8th consecutive month, even paddy has shown signs of rising inflation since February. Clearly, any assessment of our inflation trajectory will have to factor in trends emanating from the WPI as well.

However, more than conflicting trends from the wholesale and retail inflation data, the real causes of worry are the domestic and international situations, which suggest inflationary pressures are likely to persist. Latest data from the Food and Agriculture Organisation (FAO) shows a moderation in cereal prices due to seasonal factors, but it is still 28% higher than last year. It also shows increasing world prices of dairy products and meat, some of which is also reflected in Indian retail and wholesale prices. There are concerns over wheat supply, given a severe heat wave in several parts of Europe. But even without it, the fact that wheat has been getting dearer despite excess supply since September confirms the role of speculative finance in driving prices.

However, it is the domestic front that offers greater signs of worry. While wheat production has already suffered due to our untimely heat wave earlier this year, wheat prices domestically have been rising since much earlier. A policy flip-flop on exports meant that total government procurement of wheat, at 19 million tonnes this year, has been less than half its average in recent years. News on paddy is also not cheery either. Despite a normal monsoon so far for the country as a whole, there are large deficits in several paddy-growing states. As per the latest data, paddy sowing until 15 July was only 12.85 million hectares, as against 15.55 million hectares last year. Given that our paddy sowing season is almost over, this decline of 18% in sowing is likely to lead to supply shortages of rice. With signs of rising rice prices, the next big challenge could be inflation driven by rice mark-ups. Adding to our worries, the recent imposition of GST on food products including packaged cereals will push prices further up.

Clearly, any expectation that inflation will come down soon is therefore misplaced. Given the multiplicity of factors, monetary policy alone is unlikely to be of much help in containing it. It helps when inflation is driven by excess demand, but that is not the case in India right now. An excessive reliance on monetary policy may have the negative consequence of slowing our economy down, though it is already suffering from a slowdown and pandemic disruptions. In any case, monetary policy is unlikely to be effective on food inflation for which supply-side concerns are major drivers.

The rupee’s weakening and supply concerns on primary cereals add to fears of a prolonged inflationary spell. The challenge for the government is not only to contain inflation, but also protect people, particularly those at the bottom of our income distribution, from the adverse consequences of rising prices. Fortunately, we already have a mechanism to protect the poor from high food prices. The additional food-grain provided as part of the Prathan Mantri Garib Kalyan Yojana (PMGKY) has played a crucial role during the last two years, along with existing entitlements under the National Food Security Act. While extending the PMGKY for another six months beyond September will help most of India’s poor and vulnerable, the Centre may also need to expand procurement operations to provide for higher allotments of food-grains. State buying done at higher minimum support prices (MSP) is also likely to aid Indian farmers in severe rainfall-deficit areas. Given the complexity of factors driving inflation, the best way to insulate 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 the Centre de Sciences Humaines, New Delhi

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