Chapter 3.

PRICES AND INFLATION: UNDER CONTROL

UPSC/APPSC/TGPSC
mains Orintented Content
 FY22 and FY23 witnessed price pressures in core consumer goods
and services it is due to geo-political tensions(Russia-Ukraine war),
adverse weather conditions, which resulted to increased
commodity prices and witnessed price pressures in core
consumer goods and services.
 Prudent monetary policyby RBI response and calibrated trade
policy measures by the Government, coupled with strong output
growth, helped reduce core inflation to a four-year low in FY24.

 Policy measures by the Government

 Dynamic stock management

 Open market operations
 Subsidised provision of essential food items
 Trade policy measures

Which helped mitigate food inflation to a great extent.

INTRODUCTION  Low and stable inflation is key to sustaining economic growth.

 With the commitment of the Reserve Bank of India (RBI) to the
goal of price stability and policy actions by the Central
Government, India successfully managed to keep retail inflation at
5.4 per cent in FY24, the lowest level since the Covid-19 pandemic
period

Q: Historically, inflation in India’s retail inflation is lower than the EMDEs and world
advanced economies has average
generally been lower than  After the pandemic, the global economy experienced another set
in EMDEs. Discuss major of supply chain disruptions beginning with the Russia-Ukraine war
factors that play key role in the first half of FY23. In the latter half of the year and FY24,
in effective management there was a decline in global inflation because of the diminishing
of Inflation? impact of price shocks, particularly in energy prices, as well as
lower core inflation and monetary tightening.
Factors Include :
 Central Banks in major advanced economies during 2022-23
1. Established monetary significantly contributed to the decline in energy prices due to its
policies. high level of synchronisation and the resulting impact on reducing
global energy demand.
2.Mantaining economic
stability.
 Most central banks to restore price stability, the global economy
3. well-developed and has shown unexpected resilience in 2023. This is evident in both
efficient markets that advanced economies (AEs), and emerging markets & developing
balance supply and economies (EMDEs), as they are returning to their inflation targets
demand conditions.  As per the IMF2 data, where India’s inflation rate was lower than
the global average and that of EMDEs in 2022 and 2023.
4. Stable currencies
Chart III.1: India's inflation lower than EMDEs in 2023

Q: According to the World Economic Outlook Database, April 2024,

IMF,How much percentage India Inflation in 2023? 4.6%

Emerging Developing Economies (EMDE’s)

 In 2020- India Inflation is 6.2% where as EMDE’s is 5.2%

 In 2023 – India Inflation is 5.4% where as EMDE’s is 8.3%.

Advanced Economies

 In 2020- India Inflation is 6.2 where as AE’s is 0.7%

 In 2023 –India Inflation is 5.4% where as AE’s is 4.6%

Total World Inflation

 In 2020- India Inflation is 6.2% where as World Inflation is is

3.2.2%
 In 2023 – India Inflation is 5.4% where World Inflation is 6.8%.

Q: Consider the following statements

A. India's inflation lower than Emerging Developing economies -

EMDEs in 2023.
B. Inflation in advanced economies has generally been lower than in
Emerging Developing economies -EMDEs.

Choose the correct answer?

(1) A only
Q: Many countries have (2) B only
established their own (3) Both A and B
inflation targets based on (4) Neither A and B
various factors that serve
their economic objectives
best?
India’s inflation management was relatively better to keep it within the
Factors : target

(1) The level of  India is performing better than various developed and emerging
economicdevelo economies in relation to its inflation target.
pment
(2) The structure of  In 2023, India's inflation rate was within its target range of 2 to 6
the economy. per cent. Compared to advanced economies like the USA,
(3) The state of the Germany, and France, India had one of the lowest deviations from
financial System its inflation target in the triennial average inflation from 2021-
(4) the trade-off 2023.
 between
inflation and
other economic
indicators
(5)

DOMESTIC RETAIL INFLATION

 Since 2020, countries have been facing challenges in controlling

inflation. In FY23, Consumer Price Index (CPI) based retail
inflation in India was primarily influenced by higher food
inflation, while core inflation remained moderate
 Causes of High Retail Inflation:
(1) Externally, the Russia-Ukraine war
(2) Domestically, excessive heat in the summer and uneven
rainfall put pressure on food prices.
 Measurers :
(1) RBI: Monetary policy broadly focused on absorbing excess
liquidity in the system by increasing the policy repo rate
by 250 basis points from 4 per cent in May 2022 to 6.5
per cent in February 2023.
(2) The Central Government's announcement of price cuts
for LPG, petrol, and diesel led to lower LPG and petroleum
product inflation.
(3) Additionally, global commodity prices declined in 2023,
reducing price pressure in energy, metals, minerals, and
agricultural commodities through the imported inflation
channel.
(4) This Result to Low fuel and core inflation ensured a
downward trajectory for headline inflation, despite
volatility in food prices in FY24
 According to the Consumer Price Indices released by CSO, MoSPI,The
Headline Inflation ,Core inflation and Food Inflation in FY 2024 is?

Head Line Inflation: 5.4%

Core Inflation : 4.3%

Food Inflation : 7.5%

Q: Examines the detailed
trends and patterns in Note: As per the recent data released by MoSPI, the retail inflation rate
core and food inflation in was 5.1 per cent in June 2024
India ?

Trends and Pattern in Core

and Food Inflation CORE INFLATION DYNAMICS IN THE POST-PANDEMIC WORLD

Before Pandemic Trends:  Core inflation is measured by excluding food and energy items
from CPI headline inflation. It assesses the underlying price trends
In FY 2016 the core by largely eliminating the impact of price volatilities arising from
inflation is at 4.6% transitory supply shocks.

In FY 2016 the Core Goods  From the pandemic-driven highs, inflationary pressures in India
Inflation is at is 3.9% eased in FY22, aided by softening food inflation. However, core
inflation had risen to 6 per cent at the same time, driven
In FY 2016 the Core primarily by rising international commodity prices.
Services Inflation is 5.3%
Components of Core inflation:
After Pandemic Trends:

In FY 2024 the core

inflation is 4.3%

In FY 2024 the Core Goods

Inflation is at 4.9%

In FY 2024 the Core

Service Inflation is at 3.8%  In FY 2024 the core inflation is 4.3%
 In FY 2024 the Core Goods Inflation is at 4.9%
In FY24, the price situation  In FY 2024 the Core Service Inflation is at 3.8%
improved. CPI inflation  Consumer durable inflation before pandemic it is FY 2016 ,4-0%
moderated, driven by a and after Pandemic FY 2024 it is 5.9%
decline in core inflation -  In FY22 and FY23, clothing, which accounts for 48 per cent of
both goods and services. weight age in the consumer durable index, was a major driver of
Core services inflation inflation.
eased to a nine-year low in  Consumer non-durables (CND) in the CPI basket have three
FY24; at the same time, components—food and beverages, fuel and other consumption
core goods inflation also items.
declined to a four-year  Before Pandemic In FY 2016 Consumer Non Durables inflation is
low. 3.7% ,After pandemic FY 2024 Consumer Non Durables inflation is
4.1%
 Note: Consumer Non Durables inflation is highest in the year
2022 7.8%
Before Pandemic and After 
pandemic core inflation is
decline due to measures
taken by RBI FOOD INFLATION

 The RBI increased Causes:

the repo rate
gradually by 250  Food inflation has been a global phenomenon in the last two
basis points since years. Research indicates the rising vulnerability of food prices to
May 2022 to reign climate change – heat waves, uneven monsoon distribution,
inflationary unseasonal rainfall, hailstorms, torrential rainfall and historic dry
pressures. conditions.
 Due to RBI
measures the core  In FY23 and FY24, the agriculture sector was affected by extreme
inflation is decline weather events, lower reservoir levels, and damaged crops that
4 % from April adversely affected farm output and food prices.
2022 to April
2024.  So, food inflation based on the Consumer Food Price Index (CFPI)
 India’s core increased from 3.8 per cent in FY22 to 6.6 per cent in FY23 and
services inflation further to 7.5 per cent in FY24
reached a nine-
year low in FY24. Reasons for price pressures in major food items
This was aided by
moderation in  Why Tomato Prices Hiked?
housing rental The increase in tomato prices in July 2023 was caused by seasonal
inflation, with a changes in crop production, region-specific crop diseases such as
significant white fly infestation, and the early arrival of monsoon rains in the
increase in the northern part of the country. There were also logistics disruptions
stock of new in isolated areas due to heavy rains.
houses in 2023.  Why Tomato Prices Hiked?
The spike in onion prices was due to several factors, including
rainfall during the last harvesting season affecting the quality of
rabi onions, delays in sowing during the kharif season, prolonged
dry spells impacting kharif production, and trade-related measures
taken by other countries.
 Way forward: In view of the continuing seasonal surges in the
prices of vegetables like tomato and onion, it is important to
assess the progress in developing modern storage facilities
conducive to such specific crops, and evaluate the viability of such
facilities whose services have highly seasonal demand.

 Why pulses Prices Hiked?

Q: Enumerate the major The prices of pulses, particularly of tur, increased due to low
causes of food inflation in production over the past two years, caused by adverse weather
major food items in India? conditions. Urad production was affected by slow sowing progress
Suggest Measures to be in the rabi season coupled with climatic disturbances in the
taken to control the prices southern states.
on major food items?
Way Forward: India faces a persistent deficit in pulses and
consequent price pressures. Production of pulses is concentrated
in a few states and districts in the country, and is vulnerable to
biotic and abiotic stresses. More efforts are needed to expand the
area under pulses, particularly lentils, tur, and urad, in more
districts and rice-fallow areas.

It is also worth considering promoting the summer cultivation of

urad and moong in areas with assured irrigation facilities.

 Why increase in the price of milk?

Since the beginning of 2023, there has been an increase in the
price of milk. This is due to a decrease in artificial inseminations
during the peak days of the pandemic, as well as higher costs for
animal feed. The milk cooperatives increased the price of milk and
milk products to account for increased costs. The milk price
increase moderated by the end of FY24.

Measures taken by the government to tackle Food Inflation :

 The government took prompt actions, including open market

sales, retailing in specified outlets, and timely imports, to ensure
an adequate supply of essential food items.

 To ensure food security for the poor, the Pradhan Mantri Garib
Kalyan Anna Yojana, which provides free food grains to more than
81 crore beneficiaries, was extended for a period of five years
starting from January 2024.

 In November 2023, the Government introduced Bharat Atta at a

subsidised price of ₹27.50 per kg to make it affordable for
consumers.

 In February 2024, the Government introduced Bharat Rice at a

subsidised price of ₹29 per kg for selling through NAFED, NCCF and
Kendriya Bhandar.
  The Government launched Bharat Dal in July 2023 to convert
chana stock into chana dal for retail disposal at a highly subsidised
rate. Later, the Bharat Dal was extended to include Moong Dal and
Moong Sabut.

 In December 2023, the export policy of onions was amended from

the ‘free’ to the ‘prohibited’ category until 31 March 2024.

 The reduced basic duty structure on refined soybean oil, refined

sunflower oil and refined palm oil was extended until 31 March
2025.

 In October 2023, the Government extended the date of

restrictions on the export of sugar (raw sugar, white sugar, refined
sugar and organic sugar) beyond 31 October 2023 until further
order

Global food prices and domestic inflation

Edible oils :

 In India, the edible oil market heavily depends on imports, with

more than 50 per cent of the total edible oil requirement being
imported.
 The Food and Agriculture Organisation (FAO) edible oils price
index fluctuation is a key indicator of these global price trends.
 The recent downward trend in this index is broadly correlated with
the decline in domestic edible oil prices in India.
 the Government closely monitors global market trends to ensure
the availability of edible oils for consumers at an affordable price

Measures Taken by GOI (Edible oils )

 Balance imports with domestic production to mitigate the risks

associated with global price volatility.

 The National Mission on Edible Oils - Oil Palm aims to increase

domestic crude palm oil production to reduce the import burden.

 The basic duty on crude palm oil, crude soyabean oil, and crude
sunflower oil was cut from 2.5 per cent to nil. The agri-cess on oil
was reduced from 20 per cent to 5 per cent. In January 2024, this
duty structure was extended until 31 March 2025.

 The reduced basic duty structure on refined soybean oil, refined

sunflower oil and refined palm oil was extended until 31 March
2025.
  Free import of refined palm oils was extended till further orders

Sugar :

 The Government announced restrictions on export in June 2022 to

ensure sufficient local supplies and thereby manage sugar
inflation.

 These export restrictions have indeed played a role in stabilising

domestic sugar prices.

 As a result, even though the global sugar price index inflated and
has been showing volatility since February 2023, domestic sugar
prices have remained much less volatile.

INTERSTATE VARIATIONS IN RETAIL INFLATION

The inflation rate was less than 6 per cent in 29 out of the 36 States and
Union Territories.
 Q: According to the Consumer Price Indices released by CSO, MoSPI,the
state with highest percentage of rate of Retail inflation in the FY 2024 is ?

Answer: Manipur

 Manipur : 10%
 Haryana: 6.6%
 Orissa : 6.5%
 Rajasthan: 6.4%
 Telangana: 6.4%
 Andhrapradesh : 5.5%

Interstate variations in inflation are more pronounced in rural areas

 .The rural consumption basket has a much higher weightage of

food items (47.3%) than the urban (29.6%).
 The inter-state variation calculated through standard deviation is
higher in rural than urban inflation.
 States with higher overall inflation also tend to exhibit a wider
rural-to-urban inflation gap, with rural inflation exceeding urban
inflation.

 . For instance, the difference between rural and urban inflation in

Haryana was much wider compared with Goa, which had relatively
lower inflation.

OUTLOOK AND WAY  According to the the RBI expects headline inflation to be
FORWARD 4.5 per cent in FY25 and 4.1 per cent in FY26.

 According to the IMF has projected an inflation rate of

4.6 per cent in 2024 and 4.2 per cent in 2025 for India.
  According to the World Bank It projects a 3 per cent
decline in the commodity price index in 2024 and a 4 per
cent decrease in 2025, mainly driven by lower energy,
food and fertiliser prices.

 Fertiliser prices are likely to weaken but remain above

2015-2019 levels due to strong demand and export
restrictions.

Price Regulation:

 The high-frequency price monitoring data for essential

food items collected by different departments may be
linked in such a way that the build-up of prices at each
stage from the farm gate to the final consumer is
quantifiable and monitor able.

 The ongoing efforts to construct the producer price index

for goods and services may be expedited to have a greater
grasp of episodes of cost-push inflation. Further,
considering that the results of the household consumer
expenditure survey, 2022-23 of MoSPI are available, it
may be appropriate to expeditiously revise the consumer
price index with fresh weights and item baskets.

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