By Nantoo Banerjee
Indian consumers are reeling under high inflationary pressures. The costs of food, clothes, housing, transportation, medicine and healthcare have all gone up by 50 to 60 percent or even more since the middle of last year. The high fuel prices are impacting the prices of almost all commodities and services. The trend is global. According to the UN Food and Agriculture Organisation, global food prices rose by 27.3 percent in the 12 months to November, last. Prices have jumped further in the last three months, more so after the Russia-Ukraine war. Prices of essential items such as food, transport and utilities have soared. Over two-thirds of the people around the world are feeling the pinch.
The poor are facing the worst squeeze. Somehow this picture does not seem to be getting adequately reflected on India’s consumer price index (CPI). Across the world, inflation is toughest on the poorest people in society. Even in the US, according to a Congress Joint Economic Committee report in last November, the lowest-earning 20 percent of US households spend 4.5 times more of their income on housing and food and 3.5 times more on transportation than those in the top 20 percent. The same may be more than true about India’s lowest earning 20 percent.
Two separate data released lately by the Ministry of Statistics & Programme Implementation (MoSPI) showed the country’s retail inflation rose to 6.95 percent in March. The retail inflation in February was 6.07 percent. Surprisingly, Reserve Bank Governor Shaktikanta Das projected the country’s inflation at 5.7 percent in 2022-23 with “Q1 at 6.3 per cent; Q2 at 5 per cent; Q3 at 5.4 per cent and Q4 at 5.1 per cent” while unveiling the first monetary policy review for the current fiscal year. Maybe, RBI is deliberately downplaying the spectre of rising inflation to further delay a long pending intervention to control inflation.
The RBI governor’s inflation forecast appears to be totally misleading in the context of the government’s own inflation data for February and March, this year. The retail inflation in March was recorded at 6.95 percent, the highest in the last 17 months, and wholesale price spurt in February was 13.11 percent. Last month, the wholesale price (WPI) inflation soared to 14.6 percent. Even these inflation datas don’t seem to be quite reliable. Wrong international fuel price projections — based on $70 per barrel until the middle of last year — by finance ministry economists involved for the preparation of the 2022-23 national expenditure budget are already facing a flak.
International fuel prices are hovering around $110 per barrel. Back home, fuel prices are already sky-high. During this April alone, the prices soared by over 10 percent. The sharp rise in domestic petrol, diesel and fertiliser prices requires excise duty cuts to dampen its impact on the economy. Such a measure may cost the central and state governments substantially, but it will certainly help contain inflation rates that will push demand and consumption and overall economic growth.
Do consumers really have much faith in the officially pronounced inflation rates? How trustworthy are the reports on prices of select items by the field staff working for the union ministry of statistics and programme implementation (MoSPI) for calculation of WPI and CPI? Could they be guided by a government agenda to deliberately suppress the inflation picture? First of all, the basket under CPI is quite large covering some 299 commodities. It is calculated by considering the retail price change of goods and services and by taking the average weighted value of each item in the basket. The price data are believed to be collected from some selected 1,114 urban markets and 1,181 village markets covering all states and union territories through personal visits by staff members of the field operations division of the National Statistical Office (NSO), under MoSPI, on a weekly roster. During the month of January 2022, NSO collected prices from 99.7 percent villages and 98.2 percent urban markets while the market-wise prices reported therein were 89.3 percent for rural and 93.3 percent for urban.
A nation-wide reliable retail price computation in India may be easier said than done. The country has as many as 28 states and union territories. Each of them has a unique demography, history and culture, festivals, language, food habits and, more importantly, distinct consumer preferences. India has a total of 775 districts, of which Gujarat’s Kutch is the largest, West Bengal’s North 24 Parganas most populous and Central Delhi most congested. As of 2019, India recorded 6,64,369 villages. Not many of these villages boast proper rail-road connections and organised markets. Under such circumstances, retail price and inflation tracking are neither easy and not quite dependable. The collection of whole-sale prices is considerably easier and more reliable.
An inflation indicator that systematically underestimates inflation will result in a softer monetary policy. A systematic underestimation of inflation will also result in significant monetary accommodation ignoring the consequences. Such systemic problems can result in unintended consequences and, therefore, it is important to have a detailed discussion on whether our current inflation indicator adequately captures inflation. The choice of indicator for inflation targeting is important in a highly complex society such as India. For instance, Dr. Arvind Subramanian, the government’s former Chief Economic Advisor, preferred the wholesale price index while Dr. Raghuram Rajan, former RBI Governor, thought CPI, was a more useful indicator.
The rationale behind the choice of the WPI is that it attributes a lower weight to food than CPI. This means that it is more suitable for the conduct of monetary policy which has little impact on food inflation. However, Dr. Rajan felt CPI is more important and inflation expectations should be based on CPI rather than WPI making it the preferred indicator for inflation targeting. Indeed, most countries with inflation targeting framework use CPI as the inflation target. It may be important to recognise that the high share of food can lead to a situation where the overall CPI may be higher because of an increase in food price inflation. Surprisingly, as it is witnessed now in India, CPI inflation rate is 50 percent lower than WPI growth rate.
This is rather unusual, if not absurd, and gives rise to suspicion that the retail price inflation rate as published by the government is not quite reliable. That the Indian economy is already reeling under inflation is real. And, at this rate, the economy faces an ever increasing risk of stagflation and slower GDP growth. (IPA Service)
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