Russia-Ukraine leads to inflation
Mar 28, 2022
Russia-Ukraine leads to inflation
Q What is the context ?
A With the Russia-Ukraine conflict flaring into a war, global commodity prices, especially that of crude oil and gas, are likely to see a strong surge. This poses a challenge not only for India to contain inflationary pressures but also the world at large.
Q What is the problem of rising inflation ?
- At 6 per cent, India’s consumer price index (CPI) inflation crossed the upper limit of RBI’s tolerance band in January 2022.
- Implications: High inflation inflicts a large “inflation tax” on the general public whose bank savings earn an interest of less than 1 per cent.
- This is robbing the general public in the name of fuelling growth.
- India is not impervious to this tendency. Most of the major banks in the country offer interest rates between 3 to 4 per cent to depositors.
- Both the finance ministry and the RBI are betting on revving up growth, at least for the time being.
- This is fine as long as they can tame inflation within reasonable limits.
- If we want to do justice to the masses on whose deposits the entire banking system hinges, one must ensure positive real rates of interest.
Q How to ensure lower rates of inflation ?
- Given that food has a weight of more than 45 per cent in CPI in India, understanding the dynamics of food inflation is critical.
- India imports roughly 60 per cent of its consumption of edible oils, and global prices of edible oils have gone up by more than 50 per cent over the last year.
- Edible oil inflation in India was touching 35 per cent a few months back.
- This has come down to 18 per cent after the reduction on import duties.
- The Union Minister of Commerce has also recently claimed that they have brought down the inflation in pulses by imposing stock limits on traders and by lowering import duties and importing more pulses.
- The Centre has also imposed stocking limits on domestic oil/oilseed traders.
Q What can be Way Forward ?
A Reform the grain-management-cum-food-subsidy system
- Stock limit on wheat and rice with FCI: As on January 1, it is saddled with stocks that are almost four times the buffer stock norms.
- By unloading the excess grain in the open market, FCI could help in bringing down food inflation substantially as rice and wheat have a high weightage in CPI.
- In the name of the poor, India runs one of the largest but perhaps the most inefficient and corrupt public distribution system (PDS) in the world.
- Stop competitive populism: Every political party promises freebies before elections.
- Unless the Election Commission comes down heavily on such promises or a public interest litigation is filed in the Supreme Court to stop this competitive populism, Indian policymaking cannot be growth-oriented.
- Reduce the population coverage under PDS: India’s food subsidy policy covers 67 per cent of the population and distributes rice and wheat at more than 90 per cent subsidy under the National Food Security Act of 2013.
- Raise productivity: This should be combined with taking giant strides to raise productivity and producing more nutritious food while protecting the environment.
- Focus on R&D in agriculture: It’s well-known agri-R&D gives a much higher return in terms of promoting growth with competitiveness, and reduces poverty by making food cheaper and controlling food inflation
- It is important to reform the grain-management-cum-food-subsidy system to release precious resources for growth of agriculture.