Indian Economy, 5th edition (29 page)

[as quoted by the
Economic Survey 2011-12
, op. cit., p. 81-82]

WHY HAS INFLATION PERSISTED?

As per the
Economic Survey 2012-13
, inflation in protein foods, particularly eggs, meat and fish, and in fruits & vegetables has persisted because of
changes in dietary habits
and
supply constraints
:

•
Long time series data from National Accounts on
PFCE
(private final consumption expenditure) indicate a structural shift in per capita consumption. The share of food consumption in total consumption has declined over time, from an average of 51.34 per cent during 1950-60 to an average of 27.17 per cent during 2007-2012.

•
Average annual growth in per capita food consumption at 0.94 per cent during 1950-2012 has been significantly lower than the overall growth in consumption averaging 1.84 per cent. The consumption of protein foods, though increasing more slowly than the increase in PFCE, had a growth of 1.50 per cent during 1950-2012, higher than the growth of overall expenditure on food. Therefore, the share of protein foods within overall food expenditure increased from 26.28 per cent during 1950-60 to 33.71 per cent during 2007-2012.

•
A secular decline in expenditure on food relative to that in other commodities and services as expected has been associated with rising income levels.

•
Average annual growth of per capita expenditure during 1950-2011 was 2.40 per cent for non-food group. Within non-food commodities and services, average annual growth was 5.53 per cent, 3.97 per cent, 3.60 per cent and 3.42 per cent for transport and communication; recreation and education; medical and health care; and miscellaneous goods and services, respectively. Growth in expenditure for these sub sectors significantly exceeded the growth in expenditure on food.
Post reform
period (1992-93 to 2010-11) has shown a faster shift in consumption expenditure.

•
An
increase in income
made this desirable shift in consumption feasible. At national level, per capita income, adjusted for inflation continued to rise.

•
There was also a significant increase in rural wages. Rural wages in nominal terms went up by an average of over 18 per cent from 2008-09. Inflation-adjusted rural wages also went up by 7.5 per cent during this period.

•
The
input costs
for producers in both the food and non-food segments, as reflected in the prices of feed, fodder and other inputs also increased. An increase in Minimum Support Price (MSP), while necessary to ensure remunerative returns to farmers, raised the floor prices and also contributed to the rise in input prices.

Healthy Range of Inflation

Higher inflation and higher growth as a
trade-off was questioned in the late-1980s by the developed economies as the economic and social costs of higher inflation also needed policy attention—a costly ‘trade-off’.
57
In coming times, most of the world economies went in favour of a stable inflation (i.e.
inflation targeting
) though the idea has been
protested
58
. India also started inflation targeting by the early 1970s. It was in 1973 that the inflation crossed 20 per cent mark on account of the international oil price rise and the Government (the Indira Gandhi Government) devised a severe anti-inflation package which included directly restricting the disposable incomes of the people (this measure was used for the
first
time in India
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). The package had an impact and by March 1975 the inflation calmed down to 5.7 per cent. This was the time when the RBI was given a new function ‘inflation stabilization’ and India entered the era of monetary controls for inflation. With inflation targeting there started a debate concerning the healthy range of inflation for the Indian economy i.e. by mid-1970s. We may have some official and non-official versions of the suitable range of inflation pointed out from time to time:

(i)
The
Chakravarty Committee (1985)
treated 4 per cent inflation acceptable for the economy in its report on the monetary system. He also added that this level of price rise will facilitate the purpose of attracting investment for the desired level of growth.

(ii)
The
Government of India
accepted a 4 to 6 per cent range of inflation as acceptable for the economy citing the world average of 0 to 3 per cent at the time (1997–98).
60

(iii)
The RBI Governor
C. Rangarajan
advocated that the inflation rate must come down initially to 6 to 7 per cent and eventually to 5 to 6 per cent on an average over the years.
61

(iv)
The
Tarapore Committee
on Capital Account Convertibility recommended an acceptable range of 3 to 5 per cent inflation for the three year period (1997–98 to 1999–2000).
62

In the recent times (June 2003 onwards) the Government/the RBI has maintained a general policy of keeping inflation below 5 per cent mark—at any cost—as if fixing 4 to 5 per cent as the healthy range of inflation for the economy.
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The medium-term objective (i.e. target) of the Government is to keep inflation in the 4–4.5 per cent range.
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One thing should be kept in mind that inflation has always been a political matter in the country. Every time the RBI tried to check the rising inflation via monetary measures a majority of experts objected to it by calling it a move to sacrifice growth for lower price levels. A tighter monetary policy decelerates investment and growth, hampers the growth prospects of the middle class in general and the entrepreneurs in particular while the wage-earners as well as the poor segment of society feels relieved (at least in short term).

GOVERNMENT/RBI STEPS TO
CHECK INFLATION (2012-13)

Rising prices remained in news through out this financial year, too. In recent times, the GoI/RBI took the following steps to check the inflation from rising
(Economic Survey 2012-13, p.93)
–

1. Fiscal Measures

i.
Import duties for wheat, onions, pulses, and crude palmolein were reduced to zero and 7.5 per cent for refined vegetable & hydrogenated oils.

ii.
Duty-free import of white/raw sugar was extended up to 30 June 2012; presently the import duty has been fixed at 10 per cent.

2. Administrative Measures

i.
Ban on exports of onions was imposed for short periods of time whenever required. Exports of onions were calibrated through the mechanism of minimum export prices (MEP).

ii.
Futures trading in rice,
urad, tur,
guar gum and guar seed was suspended.

iii.
Exports of edible oils (except coconut oil and forest-based oil) and edible oils in blended consumer packs up to 5 kg with a capacity of 20,000 tons per annum and pulses (except
Kabuli chana
and organic pulses and lentils up to a maximum of 10,000 tonnes per annum) were banned.

iv.
Stock limits were imposed from time to time in the case of select essential commodities such as pulses, edible oil, and edible oilseeds and in respect of paddy and rice up to 30 November 2013.

3. Measures to Insulate the Vulnerable Sections

i.
The central issue prices (CIP) for rice (at Rs 5.65 per kg for below poverty line [BPL] and Rs 3 per kg for Antodaya Anna Yojana [AAY] families) and wheat (at Rs 4.15 per kg for BPL and Rs 2 per kg for AAY families) have been maintained since 2002.

ii.
Under the targeted PDS (TPDS) allocation of foodgrains is being made to 6.52 crore AAY and BPL families at 35 kg per family per month at a highly CIP.

iii.
The government has allocated rice and wheat under the Open Market Sales Scheme (OMSS).

iv.
The scheme for imports of pulses which envisaged imports for distribution to BPL households through the PDS with a subsidy of Rs 10 per kg operated from November 2008 to June 2012. The government has decided to implement a varied form with a subsidy element of Rs 20 per kg per month for BPL cardholders for the residual part of the current year. The targeted BPL cardholders will be as estimated by the Department of Food and Public Distribution.

v.
The Scheme for Distribution of Subsidized Imported Edible Oils has been implemented since 2008-9 through state/union territory (UT) governments for distribution of 1 litre per ration card per month with a central subsidy of Rs 15 per kg. The scheme has been extended up to 30 September 2013.

4. Budgetary and other Measures

i.
A number of measures were announced in Union Budget 2012-13 to augment supply and improve storage and warehousing facilities. The government launched a National Mission for Protein supplements in 2011-12 with an allocation of Rs 300 crore. To broaden the scope of production of fish to coastal aquaculture, apart from fresh water aquaculture, the outlay in 2012-13 was stepped up to Rs 500 crore. Recently the government permitted FDI in multibrand retail trading. This will help consumers and farmers as it will improve the selling and purchasing facilities.

5. Monetary Measures

i.
The RBI had also taken suitable steps to contain inflation with 13 consecutive increases by 375 basis points (bps) in policy rates from March 2010 to October 2011.

IMG ON INFLATION

An Inter-Ministerial Group (IMG) on inflation was set up on 2 February, 2011, on the recommendation of the Prime Minister, under the Chairmanship of Chief Economic Adviser, Ministry of Finance to review the overall inflation situation,
with particular reference
to primary food articles. Upto February 2013, the IMG had eight meetings covering various aspects, including information system on all aspects of price monitoring, Foreign Direct Investment (FDI) in
multi-brand retail
, reform in APMC Act, policy options for
diesel pricing
and inflation in
protein rich
products among others.

In the sixth and seventh meetings the IMG had discussed policy options to reduce the
distortions
in the prices between diesel and other petroleum product. It was suggested that in a gradual manner subsidy on diesel may be shifted to fixed per litre basis and price adjustment could be more frequent, and with regular intervals, may be on a monthly basis. It was also mentioned that any revision in diesel prices would have a direct and indirect impact on inflation, which continues to be at elevated levels. The revision, therefore, needs to be calibrated.

IMG further recommended a long term credible policy intervention for augmenting supplies of primary products. MSP based incentives without a breakthrough in productivity level, may not be sufficient. Productivity of pulses could be increased with the use of genetic seeds and a proper regulatory environment.

Producer Price Index

A working Group was set up in mid-2003–04 under the chairmanship of Prof. Abhijit Sen, Member, Planning Commission to fulfill the twin tasks of:

I.
revising the current series of the WPI (i.e. base 1993–94) and

II.
recommending a producer price index (PPI) for India which could replace the WPI.

The sub-groups of the working group have submitted their reports and the procees of revision in the base year for WPI is at the final stage. The new series (
base year
) for the WPI is decided to be the fiscal prices of 2000–01.

The proposal of switching over to the PPI (from the WPI) came up from the Government by mid-2003 and the working Group has been getting inputs from the IMF regarding it. The PPI measures price changes from the perspective of the producer while the cosumer price index (CPI) measures it from the consumers’ perspective. As the producers sell at higher prices to their wholesellers, so retailers and the price increase is translated into the higher consumer prices—thus the PPI is useful in having an idea of the consumer prices in the future.
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In PPI, only basic prices are used while taxes, trade margins and transport costs are excluded. This index is considered a better measure of inflation as price changes at primary and intermediate stages can be tracked before it gets built into the finished goods stage.
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Due to its better use many economies have switched over to the PPI—the oldest such series is maintained by the Bureau of Labor Statistics (BLS) for the US economy—the index is capable of measuring prices at the wholesaler or the producer stage—widely used by private business houses in their price targetting.
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Once India shifts from the WPI to the upcoming PPI, the economy is supposed to have a better idea of the trends inflation.

Housing Price Index

India’s official Housing Price Index (HPI) was launched by the Finance Minister on July 9, 2007 in Mumbai. Basically developed by the Indian home loans regulator, the National Housing Bank (NHB) the index is named
NHB Residex
. Presently, the index has been introduced as a pilot project for five cities—Bangalore, Bhopal, Delhi, Kolkata and Mumbai which covers different localities in each of these cities for the five-year period (2001–05).

There are various concepts of housing price indices, and many sources and ways for compiling price data—both private and public. The methodology of constructing such indices varies from country to country depending upon the use and purpose as well as the data availability. A Technical Advisory Group (TAG) was set up under the chairmanship of an adviser from the Ministry of Finance in 2006–07 which had members and experts from public and private bodies of the concerned field i.e. NHB, CSO, RBI, HDFC, HUDCD, LIC Housing Finance Ltd., Labour Bureau, Dewan Housing Finance Corporation Ltd., and the Society for Development Studies (SDS). After reviewing international best practices and the methodology, sampling techniques, collection of price data for construction of real estate price indices in the USA (index developed by the office of Federal Housing Enterprise Dversight), Canada (New Housing price Index) and the UK (Halifax Index), the TAG suggested a proper methodology for India. The TAG has conducted a pilot study for Delhi in which both the models of index-making were used.
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