Strategy for bringing inflation below 4% in India

Introduction

The Reserve Bank of India's Monetary Policy Committee (MPC) last week unanimously decided to keep the repo rate unchanged at 6.50 per cent. This decision of RBI surprised many as they were expecting a hike of 0.25% as inflation is still not within range of tolerance. However India's retail inflation for February slows down to 6.44 percent as against 6.52 percent in January 2023. The RBI is trying to ensure that the retail inflation rate remains within the range of 4%, with a margin of +/- 2%. However all things are not in the hands of RBI. The RBI now seems to realize this situation of the Indian economy and decided to keep the repo rate unchanged for time being. For an example if a Sunny Babu has 2000 Rs. and his food basket cost is 1800 Rs. then he will have only 200 Rs. for expenditure on other things. If his food basket cost is 500 Rs. then he will have 1500 Rs. for expenditure on other things which will boost consumptions in other sectors, flourishing diversified sectors with generation of employment also. Due to this, low inflation is very essential for the growth and development of a country.     

This article will evaluate and propose the strategy for bringing the inflation below 4% in India.

Why RBI cannot control inflation

As mentioned above all things are not in control of the RBI which can be utilized to manage inflation. If we see inflation data (Figure 1) we will find that components like cereals & products (15%), spices (18%), fuel & light (9%), milk & products (9%), clothing and footwear (8%), prepared meals, snacks, sweets, etc. (7%). are contributing to higher inflation rates.

Figure 1. Consumer price index of March 2023.

 

Two major components which are contributing to inflation are cereals & products and spices having inflation rates of about 15% and 18% respectively. Cereals & products comprise staple foods like wheat, rice, bajra, maize, barley, etc. India is the largest producer of bajra and second largest producer of rice and wheat in the world. India is the largest producer of spices in the world. So we cannot say that the present high inflation is due to shortage of crop productions. In this aspect also the RBI cannot do anything. But the government has role.

One example is of fuel (petroleum products) & light (9%). India imports more than 80% fuel for domestic use. The Central and State governments have putted large taxes in the form of Central Excise Duty and Value Added Tax (VAT) on petroleum products. Decreasing these taxes can ease inflation. But Governments have limited revenue resources so decreasing taxes can destabilize the balance sheet also due to current expenditure on many subsidized programs.

Another example is of milk and products. The milk and milk products are also adding in inflation (9%). But the cause behind the rise in prices of milk and milk products are Lumpy skin disease, which killed many cattle’s, and fodder shortage. In this only Central as well as State Governments can does work.

Another issue is the hike of commodities prices, by companies or traders, eventhough they do not have any supply related issue to make more profit. The recent example was of wheat. The Central Government curbed the wheat export and also sold wheat from their stock in open market. This helped to decrease the prices of wheat. 

Above examples indicates that the RBI have limited control on managing inflation. But the Central Governments can do it.      

Conclusions

At present the components which are causing high inflation are cereals & products (15%), spices (18%), fuel & light (9%), milk & products (9%), clothing and footwear (8%), prepared meals, snacks, sweets, etc. (7%). With decrease of prices of cereals & products and milk & milk products the prices of prepared meals, snacks, sweets, etc. will also come down. Managing these commodities prices will help to bring down the inflation below 4%. Accordingly a strategy is provided below.

Strategy for bringing inflation below 4% in India

The Central Government should adopt these strategies to control and manage inflation.

1. Checking production, domestic consumption and export pattern of these components commodities. For this a monthly wise domestic consumption and export pattern in comparison to total yearly production (also stocks with Government agencies like Food Corporation of India, stock in open market or private businesses) of a commodity dataset can be prepared for regular evaluation. This will help to pinpoint the issue.  

2. If production is less then India may need to import those commodities to ease the supply as a short term solution. Then side by side will have to plan to increase the productivity of those commodities as per demand in the domestic market.

3. If production and domestic consumption is fine and in equilibrium then India may need to curb on exports of those commodities to keep the ample supply in domestic market.

4. Monitoring domestic market businesses if someone is involved in price manipulation by hoarding commodities to artificially create shortage and then selling it for higher profit.  

5. Keeping eyes on other commodities so that they may not create problem. Following above strategy and managing discussed components of the Consumer Price Index will help to bring down the inflation below 4%.