The 5th chapter of the Economic Survey presents an overview of the prices and inflation rate experienced by the country over the last year, along with an explanation of the contributing factors. Inflation is on the rise all over the world, with the US experiencing its highest inflation since 1982 which was at the tail end of the oil crisis of the 1970s. The reason for this is simple. In order to mitigate the economic damage caused by the pandemic, countries have had to dramatically increase their spending/supply of money. On top of this, there have been global supply chain issues that have drastically slowed down the transportation of goods from one country to another. With lower quantities, the prices rise.
The pinch is being felt across the country. The price of crude oil shot up last year as economic activity resumed, and the price at our local petrol bunks reached record highs. The government has stabilised the price level since then, but it still remains quite high at an average of Rs. 100/litre. Overall food costs have increased as well, and this is primarily due to the price of cooking and edible oils, of which around 60% is imported. The phenomenon of inflation today is more globally consequential than it has ever been before. The pandemic has only shed further light on this fact.
As of December 2021, consumer price inflation (CPI) stood at 5.6%. The latest data (from February 14th) reveals that it has actually crossed 6%, which is beyond the limit that the RBI deems acceptable (4% +/- 2%). The global average inflation rate in advanced economies quadrupled from 0.7% in 2020 to 3.1% in 2021. Amongst emerging economics, the average for 2021 stood at 5.7%, increasing from 4.9% in 2020, mirroring the same for India. The initial increase in India was a result of the high prices seen in the ‘food and beverages’ category but that was starting to come under control. This was when crude oil prices began to shoot up which meant that inflation would remain well above 5% for 2021.
While the majority of the inflation under ‘food and beverages’ was a result of the prices of cooking and edible oils, there have been issues over the last year or two with regards to the prices of onions and tomatoes as well. The survey identifies seasonal factors which are responsible for this. Both vegetables experience an increase in price during the latter half of the year as the production reduces a lot during this period. In order to deal with future fluctuations in price, the government is reportedly looking to increase production during the off-season and work on better storage for onions as well. The Mission for Integrated Development of Horticulture (MIDH) is a programme that will provide 50% of the unit cost of Rs. 1.75 lakh which is what it takes to set up a storage unit for onions at 25 tonnes capacity. Operation Greens is another programme wherein the government will offer 50% subsidies for the transportation of tomatoes, onions, and potatoes, from surplus producing areas to areas that are more in need.
One of the more interesting observations made during both waves of the pandemic has to do with the housing sector. Contrary to what one might assume, housing prices did not vary all that vary much during either the first or the second wave. During the first wave however, the number of housing transactions reduced significantly. Prices reduced a little, but not by nearly the same margin. The housing sector was much more robust during the second wave with transaction volumes and prices increasing in most major cities.
This is not unique to India, as the housing market globally is on the up. The main reason for this has to do with the low interest rates that are available to homebuyers everywhere. One concern regarding the global market, however, is that we may witness another housing bubble if homeownership and prices rise too high. This is something that is not currently happening in India, as transaction volumes are high but prices are not increasing at the same rate.
With the inflation rate now having reached the upper limit of tolerance set by the RBI, it will be interesting to see how the government and the central bank work together to avert a potential crisis. The government would like to prioritise growth and to a certain extent, we know that the RBI is on board. In fact, at the latest Monetary Policy Committee (MPC) meeting held on the 10th of February, the RBI decided to continue maintaining the status quo, to many people’s surprise. What this tells us is that the central bank has not entirely bought in to the governments projections for growth for the upcoming year. It also tells us that the RBI feels relatively comfortable that it can keep inflation under control, as in the past it has been very cautious with regards to its inflation targets. The governments outlook for GDP growth this year is in the range od 8.0% – 8.5%, but other estimates from organisations like the IMF are taking a more conservative position. It appears as though the RBI is also aligning with this conservative view. It will now be important to keep an eye on the MPC meetings over the course of the year, as the RBI will likely tighten its hold on liquidity soon. If growth has not picked up by then, the government will have to figure out another way to give the economy a boost.