FPJ Edit: With CPI-based inflation touching 6.3%, the RBI cannot but take note, for it could lead to public anger

The inflationary trends in the economy cause grave concern. The Reserve Bank of India (RBI), ever busy setting the direction of monetary policy, is no longer in the comfort zone vis-a-vis inflation. A dip or rise in the wholesale price index (WPI) would not bother the bank as much as a similar trend in the consumer price index (CPI).

Often, WPI-based inflation is caused by a rise in commodity prices, including those of petroleum products, temporary drying up of foreign cash inflow and other external and internal factors. The manufacturing industry seeks to absorb a part of the inflation which is not passed on to the consumer. However, when CPI-based inflation breaches the comfort zone, the RBI cannot but sit up and take note of the trend, for it can lead to public anger.

Such a situation has arisen, with the WPI-based inflation hitting 12.94 per cent in May last. More worrisome, CPI-based inflation has touched 6.3 per cent. What’s worse, all indications are that both wholesale and consumer prices are bound to increase in the near future. The RBI considers a four per cent increase in CPI-based inflation as acceptable. It does not cause any concern even if it drops or increases by 2 per cent. Any increase over 6 per cent, more so when there is no slackening in sight, causes concern. Sooner than later, the people will start feeling the pinch, a situation no elected government would like to countenance.

What has dramatically pushed up the consumer prices are the petroleum and food prices. The per-litre price of petrol, for instance, has reached the three-digit figure in most states. This will have a spiralling effect on all prices, especially those of foodgrains, vegetables and fruits, which the consumer will immediately feel.

In India, there have been cases of ruling parties losing heavily in elections simply because the onion prices shot up in the retail market. However unwelcome inflation is from the common man’s point of view; economists know only too well that a modicum of inflation is good for the economy for it spurs growth. It is for the RBI to ensure that the delicate balance between the need for growth and price stability is carefully maintained.

Already, social media is abuzz with reports that the recent increase in prices of pulses and vegetables are on account of the three agricultural laws against which the farmers have been protesting on the borders of Delhi. This may or may not be true but such impressions may not do the country good. One reason why the prices shot up hugely could be due to the lockdown conditions that prevailed in many parts of the country.

Newspapers carried pictures of farmers throwing mounds of tomatoes and watermelons on the roads because of the bottlenecks in transportation. As a result, the prices of even tomatoes did not come down in many cities. There are economists who believe that price increases will moderate once companies clear supply bottlenecks caused by factory closings and other measures taken during the coronavirus pandemic.

Inflation is not confined to India. Reports from China suggest that the government there has been taking several steps to keep the prices under control. After all, the Tiananmen Square protest was prompted by a price rise. The world is also worried about how inflation in China will affect the world market, given the fact that the dragon country is the world’s factory. The recent Fed data in the US suggest that inflation is on the rise there too. There has been a huge increase in the Americans’ savings in banks as options for spending have narrowed because of the pandemic.

Unlike the US, which announced a stimulus package worth $1.9 trillion, India did not think of such an option. True, the Central and state governments have been investing in the health sector. They have also announced supply of foodgrains free of cost to the poor. Nonetheless, a proper stimulus package, like in Germany or Britain, could have left the people with money which would have eventually kickstarted the economy.

One only needs to recall how the employment guarantee scheme helped revive the rural economy and created infrastructure like roads and water tanks in thousands of villages. Today, there are millions of people who have lost their jobs and if they have to pay through their noses to get essential commodities like pulses, gas and cooking oil, it is a sure recipe for trouble.

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