Economic Survey 2016-17 Analysis for IAS Exam: Inflation
Inflation is a core issue in an economy and it affects directly or indirectly the mass of the country. In India, in order to maintain the desirable money supply in the economy, RBI along with the monetary policy committee (MPC) takes the decision regarding the various policy rates. An IAS aspirant must have such awareness regarding the factors and other parameters which largely affects the general price level of various commodities in an economy.
The Review of Inflation
The Reserve Bank of India in its sixth bi-monthly monetary policy statement kept the repo rate unchanged at 6.25 per cent. Unexpectedly, the monetary policy stance has been shifted from accommodative to neutral due to the objective of achieving 5% inflation by quarter 4 of 2016-17 and the medium-term target of 4% with a band +/- 2% on either side.
The monetary policy committee is citing concerns about the core inflation, while the headline consumer price index (CPI) inflation is moderating. This is why there is a difficult task for the monetary policy committee to analyse the role of headline inflation against core inflation in fixing the policy instance.
- For the third successive financial year, the inflation remained under control and the inflation declined to 4.9 per cent during 2015-16 from 5.9 per cent in 2014-15.
- During April-December 2016, the inflation was recorded at 4.8 per cent, but it’s hardened during the first few months of 2016-17 which was due to uprising pressure on the prices of pulses and vegetables.
- The average inflation based on the wholesale price index (WPI) declined to (-) 2.5 per cent in 2015-16 from 2.0 per cent in 2014-15.
- The global energy and commodity prices have augmented by 18 per cent and 23 per cent respectively in the first eleven months of 2016 as per the IMF price indices which reversely impacted the previous level of inflation.
- The Wholesale Price Index (WPI) inflation stood at 3.4 per cent in December 2016 and the average inflation was 2.9 per cent during April- December 2016.
- The inflation in India is constantly being driven by a narrow group of food items among which pulses are the major contributor to food inflation.
- The prices of pulses, in particular, Tur and Urad, remained persistently high from mid 2015 to mid 2016 due to shortfall in domestic and global supply but since July 2016, pulses prices except gram dal prices have been declining owing to near normal monsoon, increase in the Rabi pulses sowing and buffer build up by the Government.
- On the account of lower production and hardening the prices in the international market, the prices of sugar firmed up while the prices of vegetables have also declined sharply as the supply pick-up during the post monsoon and winter season.
- The Cost Price index food inflation (CFPI) has dipped to a two-year low of 1.4 per cent in December 2016 while the inflation for pulses & products dipped to negative 1.6 per cent in
- December 2016, and the vegetable inflation remained negative since September 2016.
Core inflation remains sticky
- Refined core inflation (exclusive of food & fuel group, petrol & diesel) based on the CPI has been averaging around 5 per cent in the current fiscal year while inflations for items like pan, tobacco & intoxicants, clothing & footwear, housing and education groups continued to be above 5 per cent and the major contributors of the core inflation.
- From last few months for the ‘transport & communication’ group has been rising in recent months partly reflecting the rise in global crude oil prices and its pass-through to domestic petrol and diesel prices.
- The price of crude oil (Indian basket) has increased from $39.9 in April 2016 to $52.7 in December 2016.
After analysing the trend of declining the wholesale and retail prices of major food items during the second half of the current financial year 2016-17 so far, the average inflation based on the Consumer Price Index (CPI) is proposed to remain below 5 per cent. For the next financial year 2017-18, the recent slight upward trend in the global commodity prices, particularly in crude oil prices, create an upside risk. The food inflation is expected to remain subdued in the light of higher Rabi sowing acreage, projected increase in the production of pulses and key agro-products globally and incisive food management and price supervising by the Government.