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Thursday, March 28, 2024

Trouble Brewing For India

Managing inflation is managing demand-side factors, supply-side factors, or a combination of both, affecting the availability of output (GDP). Demand management policy refers to the use of fiscal and monetary policy when there is inflation characterised by a positive output gap (difference between demand and supply). The agricultural output gap or the cause of food price inflation can happen because of an increase in demand-side factors, or from a reduction in the supply of outputs

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Over the last two weeks, the Opposition is disrupting the Lok Sabha on the grounds of high LPG prices and GST on pre-packaged food items as factors behind inflation. And on August 5, the Reserve Bank of India (RBI) increased the repo rate by 50 basis points to 5.4%. From a layman’s perspective, inflation happens when there is a mismatch between demand and supply of output. Managing inflation is managing demand-side factors, supply-side factors, or a combination of both, affecting the availability of output (GDP). Demand management policy refers to the use of fiscal and monetary policy when there is inflation characterised by a positive output gap (difference between demand and supply). The agricultural output gap or the cause of food price inflation can happen because of an increase in demand-side factors, or from a reduction in the supply of outputs.

Demand-side Factors: Among demand-side factors, consumption expenditure is important. In India, consumption expenditure contributes close to 65% of GDP. Since the start of this millennium, there has been an increase in real income (and hence, consumption) resulting in a shift in preference towards consuming high protein items such as meat, milk and eggs. Advocates of demand-side factors causing inflation believe in this story that increases in food price inflation are because of demand-side factors or higher income resulting from the India growth story. But consumption of food items cannot move beyond the steady-state level of consumption. This is particularly true for basic cereals and vegetables. Moreover, real wage rate data suggest that there has been a marginal increase in real wage for non-agricultural workers post-2015. For construction workers, there has been a fall in the real wage rate, particularly post-2019.

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Supply-side Factors: There has been a fall in the net sown area. As per the latest estimate, the net sown area in India is 139.3 million hectares (Annual Report 2021-22, Ministry of Agriculture, Government of India). 10 years back this number was 141.1 million hectares. Technology is also not coming to the rescue. For a long period, output per hectare, a common measure of agriculture productivity, remained low in India. For example, in potato farming, the productivity of an Indian farmer is less than half of that of the US, Germany, and the Netherlands.

Coming back to the comments by the Opposition party, let us see if indeed the rise in LPG and pre-packaged food items is fuelling inflation. In India, the consumer price index (CPI) is used as a measure of inflation. Examining the weights of various commodities in the current CPI series indicates that LPG (belonging to the Fuel and Light category) contributes a meagre 6.84%, whereas Food and Beverages contribute 45.8% of the total weight. So, inflation, as explained by CPI, is driven more by the rise in the price of food and beverages and not LPG. Within the Food and Beverages category, a large chunk (more than 10%) is contributed by fruits and vegetables whereas the newly added pre-packaged items will have less than 1% weight. Pre-packaged food items weighing more than 25 kg in a single packet would be exempted from GST. Since May, RBI has been trying to fight inflation by raising interest rates. Nevertheless, rate hikes cannot curb inflation when it is not driven by the demand side factors. Fiscal side initiatives such as reforms in the agricultural space and putting in place climate control policies may help.

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The Hills Times
The Hills Timeshttps://www.thehillstimes.in/
The Hills Times, a largely circulated English daily published from Diphu and printed in Guwahati, having vast readership in hills districts of Assam, and neighbouring Nagaland, Meghalaya, Arunachal Pradesh and Manipur.
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