Current high inflation in the Indian economy–times of india

Clipped from: Sikdar

Abhishek Sikdar graduated in Economics from St Xavier’s College under Calcutta University and post-graduation from Delhi School of Economics. He has worked in several leading business newspapers. During his service career, he had written numerous reports, conducted meetings with global economic consultants and international fund managers and imparted training programs to Sales Teams. LESS … MORE

Today about 130 crores people in the subcontinent are coping with a common problem of high inflation.
In this blog, I have discussed about the current surge in inflation, the nitty gritty of inflation, nature of inflation, the potential remedies and forecast.

So, now let’s get the ball rolling.

Consumer price inflation or CPI for urban people was 6 % in May 2021. Meat and fish CPI recorded above 14 % from January 2021. Eggs, pulses, oils, fruits, tobacco, intoxicants, non alcoholic drinks, fuel , health and transportation posted high inflation.

CPI consists of food with 36% weight, housing rent with 21 % weight and household goods and services ( 3.87 %) , health(4.81%) , transport and communication (9.73 %)
recreation and amusement ( 2.04 %) , education (3.4%).
Wholesale prices inflation or WPI of not all these have moved faster. Only eggs and fuel saw high inflation. WPI food is a low 3% only and has a weight of 15 %. CPI food is 3.8 % but has a bulk 36 % weight. So it has contributed to total CPI inflation to the tune of 1.44 % which is 0.09 % of 6% CPI inflation.
Manufacturing WPI saw high inflation such as chemicals, basic metals, textiles, paper and steel, fabricated metals.

So although CPI and WPI have risen the rise in CPI food is not seen in WPI food items. So demand for food items is high at consumer levels but not at wholesale markets. Fuel has seen hike both at consumer and wholesale levels. Manufacturing WPI is high due to which WPI general index is high above 12 % because of high weight of 64 %.

As manufacturing WPI is high CPI clothing, transportation and some food items are high besides retail demand factors. Also high manufacturing WPI means final goods producers are ramping up production as seen from high industrial(IIP )growth of 30 % in May 2021. The latter is because of high GDP growth post lockdown which has led to producers build their capacities to higher levels.
Thus this is both demand and supply driven inflation as manufacturers are raising prices reacting to higher demand in the economy as well as consumers who are finding demand because of higher incomes and post lockdown conditions. It is supply driven as manufacturers have raised their products prices. But it is not agricultural inflation.

So the government could respond to the crisis by suitable monetary policies that won’t stifle growth. Also no farm oriented policies need to be taken except for few items whose prices have risen steeply. Rather some industrial policies could be formed such as exports and credit boosters to reduce industrial inflation .
Inflation is unlikely to move down in the next 6 months as industrial production and demand are heating up. High base effect would come into play and so would headwinds of economic policies which means inflation would hit a plateau before tapering off.


Views expressed above are the author’s own.


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