Indian consumers are reeling under high inflationary pressures. The costs of food, clothes, housing, transportation, medicine, and healthcare have all gone up by 50 to 60 percent or even more since the middle of last year. The high fuel prices are impacting the prices of almost all commodities and services. The trend is global. According to the UN Food and Agriculture Organisation, global food prices rose by 27.3 percent in the 12 months to November, last. Prices have jumped further in the last three months, more so after the Russia-Ukraine war. Prices of essential items such as food, transport, and utilities have soared. Over two-thirds of the people around the world are feeling the pinch. The poor are facing the worst squeeze.
However, this picture does not seem to be getting adequately reflected in India’s consumer price index (CPI). Across the world, inflation is the toughest on the poorest people in society. Even in the US, according to a Congress Joint Economic Committee report last November, the lowest-earning 20 percent of US households spend 4.5 times more of their income on housing and food and 3.5 times more on transportation than those in the top 20 percent. The same may be more than true about India’s lowest-earning 20 percent. Two separate data released lately by the Ministry of Statistics & Programme Implementation (MoSPI) showed the country’s retail inflation rose to 6.95 percent in March. The retail inflation in February was 6.07 percent. Surprisingly, Reserve Bank Governor Shaktikanta Das projected the country’s inflation at 5.7 percent in 2022-23 with “Q1 at 6.3 percent; Q2 at 5 percent; Q3 at 5.4 percent, and Q4 at 5.1 percent” while unveiling the first monetary policy review for the current fiscal year.
A nationwide reliable retail price computation in India may be easier said than done. The country has as many as 28 states and Union Territories. Each of them has a unique demography, history and culture, festivals, language, food habits, and, more importantly, distinct consumer preferences. India has a total of 775 districts, of which Gujarat’s Kutch is the largest, West Bengal’s North 24 Parganas most populous and Central Delhi most congested. As of 2019, India recorded 6,64,369 villages. Not many of these villages boast proper rail-road connections and organised markets. Under such circumstances, retail price and inflation tracking are neither easy and not quite dependable. The collection of wholesale prices is considerably easier and more reliable. An inflation indicator that systematically underestimates inflation will result in a softer monetary policy. A systematic underestimation of inflation will also result in significant monetary accommodation ignoring the consequences. Such systemic problems can result in unintended consequences and, therefore, it is important to have a detailed discussion on whether our current inflation indicator adequately captures inflation. The choice of indicator for inflation targeting is important in a highly complex society such as India. For instance, Dr. Arvind Subramanian, the government’s former chief economic advisor, preferred the wholesale price index while Dr. Raghuram Rajan, former RBI Governor, thought CPI, was a more useful indicator. That the Indian economy is already reeling under-inflation is real. And, at this rate, the economy faces an ever-increasing risk of stagflation and slower GDP growth.