Economic Survey Vol.2 Ch.5: Prices And Inflation

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Inflation has been witnessing moderation since 2014 backed by low food inflation. During the current financial year, however, food and beverage inflation have been trending differently. Food inflation has been on an upward trend mainly backed by raising vegetables, fruits, and pulses prices.  However, the volatility in prices of most of the essential agricultural commodities with some exceptions like pulses has been on a downward trend.

Since July 2018, CPI-Urban inflation has been consistently higher than CPI-Rural inflation, which is in contrast to an earlier trend where rural inflation was higher than urban inflation. Inflation has been declining in most of the states; however, the variability of inflation has been increasing.

CURRENT TRENDS IN INFLATION

  • Headline inflation based on CPI-C has been sliding on a downward path since 2014. The average CPI-C headline inflation, which was 5.9 % in 2014- 15, has fallen continuously to around 3.4 % in 2018-19. This has been led by a drastic fall in food inflation, which has fallen from 6.4 % in 2014-15 to 0.1 % in 2018-19. In 2019-20, there has been a slight uptick in the headline and food inflation numbers since August 2019.
  • Overall, CPI -C headline inflation in December 2019 stood at 7.4 %, while CPI-food inflation increased to 14.1% mainly driven by the rise in vegetable prices. Core (non-food non-fuel) inflation has also increased to 3.8% in December 2019.

Since July 2018, CPI-Urban inflation has been consistently above CPI-Rural inflation.

  • This is in contrast to earlier experience where rural inflation has been mostly higher than urban inflation.
  • The divergence has been mainly on account of the differential rates of food inflation between rural and urban areas witnessed during this period.

In 2019-20, there has been a sudden change in the trend.

  • Urban areas have registered much higher food inflation when compared to rural areas.
  • The slide in rural inflation could be because of a fall in the growth of real rural wages.
  • The divergence in rural-urban inflation is not just observed in the food component but in other components also In clothing and footwear, inflation in urban areas is higher than that observed in rural areas.
  • For Pan, tobacco and intoxicants, Fuel and light and miscellaneous groups, inflation observed in rural areas was higher than that in the urban areas.

Inflation in States

  • CPI-C inflation has continued to be highly variable across States. However, the overall inflation rate has been quite low in almost all the States. Though in most of the states the overall inflation rate in rural areas is lower than the overall inflation rate in urban areas.

Drivers of Inflation 

  • During 2019-20, food and beverages emerged as the main contributor to CPI-C inflation. The miscellaneous group was the second-largest contributor to inflation during this period.

Crude Oil and Fuel Inflation

  • World crude oil prices declined to owe to weak global demand. As oil has a major share in the country’s import basket, it impacts considerably domestic prices of petroleum products. The mineral oils group in WPI saw inflation of 5.8 % in mid-2019, thereafter saw a continuous decline.

Food Inflation

  • Some commodities such as onion, tomato and pulses have shown high inflation since August 2019. Untimely rains have caused lower production as well as constricted the movement of onion and tomato to the markets.
  • In the case of pulses, the progress in sowing has been at much lower levels than in the previous year. Some pulses also experienced Cobweb Phenomena which is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices. The farmers are caught in the cobweb phenomenon when they base their sowing decisions on prices witnessed in the previous marketing period.
  • To prevent the occurrence of the cobweb phenomenon, it is essential that apart from existing measures in place to safeguard pulses farmers from crop failure/price shocks like market intervention under Price Stabilization Fund (PSF), coverage under Pradhan Mantri Fasal Bima Yojana, PM-AASHA, providing warehouses, improving transportation, price discovery through eNAM etc., free export of pulses also needs to be encouraged for India to become self-sufficient in pulses production. 

Drug Pricing

  • Out of the total out of pocket expenditure of individuals on health, the major portion is that of medicines this makes the provision of affordable drugs an imperative.
  • Indian pharmaceutical sector is an important sector not only because of the welfare implications it has but also because of its economic importance as a sector with a proven record of technical capability and global standing.
  • The sector has grown considerably in recent years and has potential for further development in the coming years.
  • The fixation of ceiling prices/Maximum Retail Price (MRP) has resulted in a large saving of 12,447 crores to the public after the implementation of DPCO, 2013.
  • It has been observed that there is a 26% increase in the sales of the cardiac stents in the Indian market in the post price capping period (2017).
  • It has also been observed that indigenous manufacturers have benefited from the price capping as their share in the production has increased by 10% in post price capping period.

Volatility in Essential Commodity Prices

  • It has been seen that overall price volatility was highest for vegetables and lowest for rice, wheat and palm oil.
  • Prices of rice and wheat remained stable since 2014 due to:
    • Adequate supply arising out of sufficient domestic production
    • Also due to maintenance of adequate buffer stock of rice and wheat for meeting the food security requirements.
    • There was a significant rise in volatility for pulses, sugar and tomatoes during 2014 – 2019.

Causes affecting Price Volatility

  • The extent to which given production and consumption shocks translate into price volatility depends on supply and demand elasticities.
  • Stockholding and speculation can have a major impact on price variability, either stabilising or destabilizing.
  • Perishability of the commodities also adds to price volatility.
  • Presence of marketing channels, storage facilities, and effective MSP system can help limit price volatility.

Trends in Global Commodity Prices

  • As per the commodity prices published by the World Bank, energy commodity prices have shown a decreasing trend in 2019-20.
  • In terms of food prices, the deflationary trend has continued.
  • The metals and minerals index also showed a deflationary trend. 

 

Terms

Inflation:

  • The rate at which the general level of prices for goods and services is rising and the purchasing power of currency is falling.

Deflation

  • Deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time.

Disinflation

  • Disinflation is a slowing in the rate of price inflation.
  • It is used to describe instances when the inflation rate has reduced marginally over the short term.

Core inflation

  • Inflation that is likely to continue for a long period, therefore, more stable. Unlike the non-core component of inflation, core inflation is not affected by temporary shocks

Phillips Curve

  • Describing a historical inverse relationship between rates of unemployment and corresponding rates of inflation that result within an economy.  



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