Inflation in India-Pre and Post Covid Times-a discussion
Rohit Kumar Parmar Free lance [1]
IES (Retd)
Former Senior Economic Adviser
I. Introduction
Observations by a Radio Jockey on January 28, 2021 provoked this discussion. (yes I do listen to Radio). The Observation- increase in fuel costs and other prices, accompanied with near stable earnings in some cases; reduced earnings in others; and no earnings in several others; continues to cause severe stress on household budgets. The second observation in the programme was that in some parts of India, petrol now costs hundred rupees a litre.
Another reason for the discussion is the news that government is inclined for an outward shift in the inflation target/band by one percent. (https://www.hindustantimes.com/budget/govt-mulls-5-inflation-goal-to-give-rbi-room-to-trim-rates-101611779892013.html) The present inflation target of 4 per cent in vogue since 2016, implied a lower band of 2 per cent and upper band of 6 per cent. These would move outwards by one percent each to 3 and 7 respectively. This shift is expected to legitimise cut in interest rates by RBI, even though it is not warranted by inflation.
The question up for discussion in this paper is -Whether inflation can be controlled? A possible answer is Yes, if you can spell,[2] understand and chose to control it.
The definition of Inflation as the `General rise in the price level’ has changed over time and is now
`…Inflation is the rate at which the value of a currency declines and consequently the general level of prices for goods and services is rising…’
Inflation is measured by increases in Consumer Price/Wholesale Indices. The movement of CPI, CPI (Food) and WPI is also analysed in this discussion.
II. Short Review of Theories and/or Explanation for Inflation
Inflation simply put is a mismatch between demand and supply, which in the absence of vents (options to augment supply or curtail demand) translates into very high prices. There is a role for expectations and for players of the same (speculators), who are plenty in India, suitably aided by over-regulation and over-legislation, which as barriers to entry restrict competition, which could act to check increases in price. Typically in open and developed economies, inflation is moderate and a short term phenomenon, with relatively lesser role for expectations and speculators.
Some of the theories of inflation are considered in the Indian context- Demand-Pull inflation, Cost-Push inflation, etc., in order to link it to present inflation in India and maybe suggest tiny steps to check or moderate it.
There are two schools of thought that theorize or explain inflation - Monetarists associate inflation to monetary causes and suggest monetary measures to control it. Structuralists attribute inflation to an unbalanced economic system and suggest a mix of monetary and fiscal measures to control it.
The present discussion does not debate on the validity of different theories/ explanations/schools of thought, but seeks to understand Indian inflation in their (theories) context.
II.1 Cost Push Inflation
Cost-push inflation is caused by substantial increases in the cost of input/key input, where no substitute is available. Higher prices are due to increases in cost of production which are passed on to consumers. This increase is aggravated when it is a key input like oil, which impact the prices of all goods and services.
In the Indian context, an oil import dependent economy, increase in crude oil price during 2016-19, (Brent Crude oil prices increased from $ 33.01 per barrel on February 18, 2016 to $ 85.63 barrel on October 2, 2018 and stayed above $ 60) caused high rates of inflation, and were accompanied by increase in the price of food, other administered prices and tax rates. The higher price increases were aided by the Indian economy being closed and an increase in protection.
The problem of inflation due to oil price was aggravated since the government chose not to reverse the increases, when crude oil prices decreased, but to apportion to themselves the fall in the oil prices during 2019-20. (Brent Crude oil prices decreased from $ 70.25 on January 6, 2020 to $ 17.36 on April 20, 2020) The need to pass the decrease in the oil prices has been argued earlier by this author details of which are -
November 24, 2018
`…Is anybody keeping track of whether all the decrease has been passed on by the oil companies to the consumer…’
February 23, 2020
`…Whether u believe that
the current slow down is recession or not
It is structural or cyclical
For domestic or external factors
In one or all sectors
Or you have a 6/4 vision to see green shoots when those with corrected 6/6 cannot
Are a Monetarist
Support a sector fund for telecom also
The impact of Corona virus has resulted in a reduction in crude oil prices
This should have been Fully passed on to the consumer since
It will cut costs and create some resource in the hands of the households
Spur demand in some areas
Save some businesses from slipping into the grave
It is a more efficient form of action
However after some and not full passover of the reduction in petrol and diesel prices, a reversal has happened and prices increased
Which is totally against any canon or principles of Economics
Why??
Please continue to passover the reduction fully…’
February 28, 2020
`…Please pass on the reduction of crude oil by at least 12 percent to the consumer as argued in my earlier post…’
March 9, 2020
`…Oil prices down to 27 $ a barrel
Please pass on all the reduction in oil prices to the consumers
There is no better fiscal stimulus than this
It will revive Consumption and Investment
Don't delay…’
However, when oil price started to increase later in 2020, (to $ 55.44 on January 25, 2021) the same was further passed on to the consumer, contributing further to cost-push inflation.
II.2 Demand-Pull theory of Inflation:
Demand Pull theory of inflation suggests that when there is excess demand over supply, the same translates into higher prices, so inflation. The excess demand could be artificial or fuelled by external intervention, as in the case of India.
Demand pull inflation is more likely to happen in full employment condition, when demand increases are not matched by supply increases, so inflation becomes unavoidable. An analogy of this argument is where resources (including labour) are not fully utilised, there should be moderate/no inflation. However, in the Indian context there is neither full employment nor full capacity utilisation. In infrastructure and industry, there is excess capacity on account of a decrease in the rate of growth of the Indian economy since 2016. What then is fuelling inflation in India?
Excess government intervention at the aggregate and individual sector level, shifts outwards the demand curve, which is not associated with an outward shift of the supply curve, in the present, subsequent or later period. At the aggregate level, large fiscal deficit contributes to excess demand and also has the effect of crowding out private investment. The much touted reduction in fiscal deficit during the last few years is accompanied with delays in subsidy payments, forcing States/ PSUs to borrow to pay for subsidy and off-budget accounting. Fiscal deficit should be cut without accounting jugglery and/or postponing payments.
An individual sector example on how inflation is contributed by government actions is the procurement of wheat and rice under the National Food Security Act, 2013 (NFSA), which adds to demand and so increases the price, but does not augment supply in any period (present, subsequent or later). Wheat and rice parked in godowns, adds to cost of foodgrain operations, and is added to arrive at the sale price in later periods, and contributes to cost-push inflation. The entire market intervention in the wheat and rice markets needs to be gradually deregulated.
The stocking and release of wheat and rice is marred with red tape and there are delays and wastages, not augmenting timely supply. The present Covid crisis resulted in large sections of identified beneficiary populations being deprived because of closure of schools (mid-day meals), non-availing of ration cards by migrant labour due to no ration cards and/or the non-rollout of portability of ration cards.
The working of the Food Corporation of India (FCI) that carries out operations on behalf of government needs to be streamlined on the basis of recommendations of the Shanta Kumar Committee.
The excess demand of the government spreads across all sectors vehicles, ambulances, stationary, buildings, roads (large new highways are highly underutilised), etc. Realistic demand of the government linked to utilisation can help to curb demand and so price of the item and also inflation.
II.3 Monetarist School
Monetarist believe that inflation is impacted by the pace of money supply growth. There are equations to support the proposition, which through econometric exercises estimate the parameters. Growth of money supply detailed below, however, does not support the proposition that inflation has been caused by higher growth of money supply.
During 2018-19, the Growth of Money Supply (M3) decreased from 10.6 per cent to 8.8 per cent; Currency holding (a component of M3) decreased from 16.8 per cent to 14.0 per cent; Growth of Demand Deposits (another component of M3) decreased from 9.6. per cent to 6.8 per cent. The growth of deposits further decreased during the current financial year by (-) 7.0 per cent. Clearly current inflation does not appear to be driven by expansion in money supply.
III. Inflation Trends in India [3]
From low and negative inflation rates (measured in terms of wholesale prices) recorded during 2015-18, India has since 2018 been recording very high rates of inflation, especially Food inflation. (Table 1 and Chart 2)
High inflation rate especially food inflation due to higher oil prices, has severely impacted sections of lower and middle income group, who cannot book this expenditure under some tax saving head like the formal and corporate sector, nor can pass on the same as higher price. In other deregulated economies, the pass over of the fall in global oil prices is complete. There is need to fully pass decreases in crude oil prices and to roll back hikes in taxes and duties.
There are dimensions of inflation that cause additional concern. (Table 1) First, is the higher inflation at the retail level via-á-vis the wholesale level. An interpretation of this `that not only are prices at the retail level higher, when compared to the wholesale level, they also increase at higher rates.’ This inter-alia suggests greater imperfection in the retail markets and the need to enhance competition by removing controls and barriers to entry, especially at the retail level.
The Second concern is higher inflation in food articles, compared to overall consumer prices (as captured by the CPI). In fact, food inflation during 2019-20 is 13 percentage points higher than overall inflation. Households facing lower increases in (per capita) incomes, reduced and/or inferior employment, inadequate resources for social sector spending, is additionally burdened with higher food inflation.
IV. Conclusion
To sum up
i. A near stable earnings in some cases; reduced earnings in others; and no earnings in several others; continues to cause severe stress on household budgets, especially during the post-Covid period and needs to be addressed.
ii. Increases in crude-oil prices during 2016-19, accompanied by increase in the price of food, administered prices and tax rates caused high rates of inflation. The problem of inflation was aggravated since government chose not to reverse, but to apportion to themselves, fall in oil prices during 2019-20. The need to pass the decrease in the oil prices argued earlier is reiterated.
iii. Large fiscal deficit contributes to excess demand and so inflation and also has the effect of crowding out private investment. The much touted reduction in fiscal deficit during the last few years is accompanied with delays in subsidy payments, forcing States/ PSUs to borrow to pay for subsidy and off-budget accounting. Fiscal deficit should cut without accounting jugglery and/or postponing payments.
iv. Inflation is also contributed by actions such as the procurement of wheat and rice under the National Food Security Act, 2013 (NFSA), which adds to demand and so increases the price, but does not augment supply in any period (present, subsequent or later). Wheat and rice parked in godowns, adds to the cost of foodgrain operations, and is added to arrive at sale price in later periods, and contributes to cost-push inflation. The entire market intervention in the wheat and rice markets needs to be gradually deregulated.
v. The stocking and release of wheat and rice is marred with red tape and there are delays and wastages, not augmenting timely supply. The present Covid crisis resulted in large sections of the identified beneficiary population being deprived because of closure of schools (mid-day meals), non-availing of ration cards by migrant labour due to no ration cards and/or the non-rollout of portability of ration cards.
vi. The working of the Food Corporation of India (FCI) that carries out operations on behalf of government needs to be streamlined on the basis of recommendations of the Shanta Kumar Committee.
vii. Inflation due to increase in oil prices has severely impacted sections of the lower and middle income group, who cannot book this expenditure under some tax saving head like the formal and corporate sector, nor can pass on the same as higher price. There is need to fully pass decreases in crude oil prices and to roll back hikes in taxes and duties.
viii. The higher increase in retail prices (CPI) and higher Food inflation need to be addressed by freeing up these markets of controls.
[1] Author has in posts on his website (https://rohitkparmar.wixsite.com/site), twitter (https://twitter.com/rohitkparmar?s=09), facebook (https://www.facebook.com/me/), linkedin (https://www.linkedin.com/in/rohit-kumar-parmar-841b4724) been writing on impact of Covid and can be reached at rohitkparmar@yahoo.com. Starting 1992, the author has been writing on Direct Tax Reforms in `The Economic Times’. Some of these are available on his website. [2] In Ministry of Finance, Department of Economic Affairs, Paper 5/2011-DEA titled `Understanding Inflation and Controlling it.’ December 14, 2015, the print version spelled `inflation’ incorrectly. https://dea.gov.in/working-papers?page=2 [3] This is from India’s Economic, Financial and Social Performance during 2020 https://rohitkparmar.wixsite.com/site/post/india-s-economic-financial-and-social-performance-during-2020
ความคิดเห็น