Inflation Data Reveals India’s Economic Challenge

Context

The June inflation data for India is a mixed bag, with all three of the Consumer Price Index (CPI), Wholesale Price Index (WPI) and Producer Price Index (PPI) showing an increase in prices.

Key Highlights

• The CPI inflation stood at 4.38 per cent, the WPI inflation stood at 9.87 per cent and the output PPI inflation stood at 9.57 per cent.
• But low core inflation suggests that the inflation narrative is not only one of rising prices; it also suggests production cost pressures and weak consumption, and increased reliance on China.

What the Three Inflation Indices Indicate

• The data on CPI inflation is used by the Reserve Bank of India to determine the 4 per cent inflation target and the prices paid by its consumers are the most important.
• WPI inflation measures the prices of wholesale goods and offers indications of price pressures at the bulk goods level.
• PPI provides a measure of prices charged by producers and is used to gauge the inflationary conditions in the production industry.
• The difference between these indices gives valuable insights into the overall health of the Indian economy.

Subdued Core Inflation and Weak Consumption

• The rate of core inflation, excluding volatile food and fuel prices, continued in the 3.9 per cent range.
• The slight acceleration in core inflation indicates that core consumption demand is weak.
• India’s recent growth has been increasingly based on gross fixed capital formation and investment as opposed to private consumption.
• This means the state is experiencing a growth in productive capacity at a faster rate than consumer demand.
• So, a good GDP performance does not necessarily mean a good performance of household purchasing power or discretionary consumption.

China Factor and Imported Deflation

• Slightly damped Indian non-food and non-fuel inflation has been fuelled by falling producer prices from China, as well.
• This increasing dependency of the Indian supply chains on China has further enhanced the flow of price trends to the Indian economy.
• More than $130 billion worth of goods are imported into India from China annually, placing it at risk from external prices.
• It means India has been importing “deflation” from China via the lower cost of manufactured goods.
• This is a call to action to boost domestic production and to minimize overreliance on global supply chains.

Rising Costs and Pressure on Profits

• Higher prices of commercial LPG are now being felt in the restaurant and services sector, where inflationary pressures are now beginning to be seen.
• For manufacturers, however, the rising prices of raw materials do not seem to be affecting profits since they are being internalized.
• Input PPI growth and a decline in manufacturing output PPI indicate profit compression.
• This may deter private investment if there are ongoing cost pressures without any corresponding increase in demand.

Way Ahead

• The government and RBI need to be mindful of the gap between head and core inflation.
• Monetary policy should serve the dual purpose of controlling inflation and supporting economic demand and private consumption.
• India needs to speed up domestic manufacturing, diversification of the supply chain and strategic import substitution.
• Investment-led growth needs to be gradually complemented by improved employment creation and income growth of households.
• The monitoring of inflation is a comprehensive exercise that can be done with the help of both CPI, WPI and PPI to enhance economic policy making.

Conclusion

• Indian inflation data reveal that measuring price stability with just one index is inappropriate.
• While food and fuel pressures are pushing headline inflation upwards, subdued core inflation points towards weak consumption.
• The more difficult task is to make India’s investment-fueled growth work for the masses, to increase household incomes and ensure robust domestic production.

Source: The Indian Express

Prelims PYQ

Q. In India, which one of the following is responsible for maintaining price stability by controlling inflation? (2022) 

(a) Department of Consumer Affairs
(b) Expenditure Management Commission
(c) Financial Stability and Development Council
(d) Reserve Bank of India

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