What did economic survey (2015-2016) say about inflation and expectations about inflation?
Inflation has remained quiescent, hovering within the RBI’s target range of 4-6 percent.
Expectations that inflation will be under control due to the following reasons
The first point on discussion is why will 7Th Pay commission not result in increase of inflation?
Three reasons were cited by the survey
- Even though wages will increase the government will get back part of the wages/ salary in the form of taxes. And moreover wages form only a part of the factor behind increase in demand for goods. Hence inflation may be under control even after increase in wages through 7th pay commission
- However if there is a spill over of Government’s spendings in the form of salary to private sector there amy be a higher impact on inflation. But that too does not seem to happen as there is a slack in private sector employment levels.
- The third issue is about HRA which can influence the rent and increase CPI. But the increase is expcted to be modest and may be absorbed back by Government.
The other major points why Government though that inflation will be under control are as follows
- If the monsoon returns to normal, food prices will ease
- Government remains committed to disciplined increases in MSPs for cereals
- Rural wage growth remains muted (*)
- Oil prices have plunged in the first two months of 2016, as have some commodity prices, suggesting that input prices are likely to be lower next fiscal year
- As growth in China continues to slow, excess capacity there could continue to increase, which will put further downward pressure on the prices of tradable goods all around the world.
How has the expectation on inflation has changed in the recent past? How has it reflected in the WPI and CPI?
- WPI inflation increase and its causes
- Wholesale price inflation accelerated to a 23-month high of 3.6 per cent in July, driven mainly by higher food prices
- The pace of price gains as measured by the wholesale price index more than doubled in July from 1.62 per cent in June
- Within the food category, inflation in foodgrains accelerated to 13.6 per cent in July from 10.9 per cent in June.
- The fruits and vegetables category saw a whopping 22 per cent increase in prices in July but this could be due to a low base effect because the category saw a contraction of 15 per cent in the year-earlier period.
- CPI inflation increase and its causes
- The Consumer Price Index for July also saw inflation accelerating to above 6 per cent, with the food component reaching almost 8 per cent
- Retail inflation quickened past the Centre’s new Monetary Policy Framework’s upper limit for tolerance to 6.07 per cent.
- The rise was mainly driven by food, with vegetable inflation higher than the usual seasonal rise at this time of the year.
- While pulses inflation started moderating, prices of pulses have been rising again since April after a short-lived correction in the previous quarter.
- Inflation pressures are also incipient in cereals.
When Supply side seems to be comfortable why inflation is being caused due to food articles?
There is a forecast of normal rainfall this year.After a delayed onset, the south west monsoon picked up vigorously from the third week of June. By early August, the cumulative rainfall was 3 per cent higher than the long period average, with more than 80 per cent of the country receiving normal to excess precipitation. Kharif sowing strengthened after a lacklustre start, particularly with respect to pulses. These developments engender greater confidence about the near-term outlook for value added in agriculture. The target for kharif production set by the Ministry of Agriculture appears within reach.
The improvement in sowing on the back of the steady progress of the monsoon, are clear indicators that the outlook for supply can only improve going forward.
So we need to analyse the demand side factors to understand the inflation is happening!
According to a January 2016 International Monetary Fund working paper on ‘Understanding India’s Food Inflation: the Role of Demand and Supply Factors’, rising rural incomes have had the largest impact on food inflation Economic survey expected that the rural wages may not increase as a result rural income will remain under control (*). However since income in the rural areas started increasing (may be due to increased MSP and other price supporting polices and due to MNREGA) and it started having larger impact on inflation.
Rising incomes will prompt shifts in food consumption away from simple starchy plant-dominate diets towards more nutritious and high-value foods that include arange of dairy products, vegetables and fruits, and meat.
Increase in food inflation is also because of the large weight on food in household expenditureand it has meant that robust income growth has tended to increase demand-side pressures more than the supply-side gains.
So what should be the path forward to control inflation?
The acceleration of India’s economic growth witnessed during the last ten years (as India’s economic growth picks up, food demand pressures will remain strong, particularly for high-value foods, such as dairy products and animal-based proteins) accompanied by stagnant agriculture growth, resulted in excess demand for food, giving rise to relative food price inflation.
- Going forward, excess demand will likely re-emerge, and thus a durable increase in supply, in particularly through enhancing agricultural yields for key commodities, would be required to keep food inflation in check.
- A well-designed cereal buffer stock liquidation policy could also help mitigate food inflation volatility.
- Administered price setting, such as through MSPs and supporting policies, which continue to pose challenges for monetary policy management in India should also be moderated to keep inflation under control.
Do you Know- Interesting Facts about Inflation levels?
|In Zimbabwe- Hyperinflation occurred
In Venezuela- Hyperinflation occurred
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