Hindu Editorial Analysis : 16-May-2023
Inflation, specifically in the areas of cereal and milk, poses a significant challenge for India. With these sectors carrying substantial weights in the Consumer Price Index (CPI), it becomes crucial to address the rising prices. This essay will explore the responsibility and objectives of the Reserve Bank of India (RBI) in maintaining price stability, the drivers of inflation, the measurement of inflation through the Wholesale Price Index (WPI) and Consumer Price Index (CPI), and the issues and challenges associated with food and beverages components in the Indian CPI.
Responsibility and Objective of the RBI:
The RBI holds the responsibility of devising monetary policies with the primary objective of maintaining price stability while considering the goal of economic growth. It targets a retail inflation level of 4% but allows for inflation to vary between 2% and 6% in specific months. A certain level of inflation is desirable as it stimulates economic activity.
Understanding Inflation and Its Drivers:
Inflation occurs when there is an imbalance between demand and supply. Fast economic growth often leads to increased demand and subsequently higher prices. The drivers of inflation can be categorized into demand-pull inflation, cost-push inflation, exchange rates, and demand-supply gaps. Understanding these drivers is essential to tackle inflation effectively.
Measuring Inflation with WPI and CPI:
In India, inflation is primarily measured through two indices: the Wholesale Price Index (WPI) and the Consumer Price Index (CPI). WPI tracks wholesale price changes, while CPI focuses on retail-level price changes. The CPI includes a market basket of common goods and services used by consumers such as food, housing, apparel, transportation, and more. The base year for CPI is 2012, while the new series of WPI with base 2011-12 is effective from April 2017.
Challenges in the Food and Beverages Component of the Indian CPI:
The food and beverages component holds the highest weightage of 45.86% in the Indian CPI, which necessitates its management to control overall inflation. Unlike other components, managing food inflation cannot be achieved solely through monetary or fiscal policies. External shocks, like droughts and supply chain disruptions, often trigger food inflation. Therefore, it is crucial to find strategies to keep food inflation below 4% even during challenging times.
Addressing Rice and Wheat Inflation:
Rice and wheat are the major crops in India, and their inflation rates significantly impact overall food prices. Government schemes, such as the PM-Garib Kalyan Yojana, provide free rice and wheat to over 800 million people, protecting them from inflation. The Food Corporation of India (FCI) holds significant rice stocks, allowing for open market operations to regulate prices. Adequate wheat procurement ensures a balance between the public distribution system (PDS) and open market operations.
Taming Cereal Inflation through Buffer Stocking:
Cereal inflation remains a concern, with an overall inflation rate of 13.7%. To address this, a proactive approach to buffer stocking policy is required. This strategy proves to be more effective than relying solely on monetary policy instruments.
Milk Inflation: Challenges and Solutions:
India is currently facing milk inflation due to a shortage of milk fat. This scarcity has prompted dairies to increase full-cream milk prices or reduce fat content through product rebranding. Reports of branded ghee and butter disappearing from store shelves have also emerged. To address this issue, the government and dairy industry must focus on increasing milk fat production and finding alternative solutions to ensure stable milk prices.
Why In News
In order to address the rising inflationary pressures, India should prioritize its efforts to mitigate the inflation rates of cereals and milk, as both commodities carry significant weights in the Consumer Price Index (CPI). By implementing effective measures to control the prices of these essential food items, the government can alleviate the burden on consumers and ensure stability in the overall inflationary environment.
MCQs about Taming Cereal and Milk Prices in India
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What is the primary objective of the Reserve Bank of India (RBI) regarding monetary policy?
A. Maximizing economic growth
B. Maintaining price stability
C. Controlling inflation and unemployment
D. Enhancing international trade
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What is the primary driver of demand-pull inflation?
A. Increased cost of production
B. Exchange rate fluctuations
C. High demand and low supply
D. External shocks
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Which index primarily measures retail inflation in India?
A. Wholesale Price Index (WPI)
B. Consumer Price Index (CPI)
C. Producer Price Index (PPI)
D. Gross Domestic Product (GDP) deflator
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What is the major challenge faced in managing the food and beverages component in the Indian CPI?
A. Fluctuations in exchange rates
B. High demand and low production
C. Impact of external shocks
D. Limited monetary policy effectiveness
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