In broad sense, inflation is that state in which the prices of goods and services rises on one hand and value of money falls on the other. When the money circulation exceeds the production of goods and services, the state of inflation takes place in the economy.
It is well recognized that inflation in India is a structural as well as monetary phenomenon. In the short-term, localized demand-supply imbalances in wage goods often due to seasonal variations in production-coupled with market rigidities and regulatory failures have supported inflationary expectations that have resulted in a more widespread impact on the consumers than the initial inflationary impulse.
In the medium-to long-term, the movement and outcome of monetary aggregates such as money supply and interest rates of the financial systems have influenced aggregate demand and consequently changes in price levels in the economy.
The later considerations and the influence of global commodity prices on the domestic prices have become more important with the opening and growing integration of the Indian economy with the rest of the world. Indeed the fiscal 2007-08 has demonstrated this facet of the economy more than ever before. With huge surge in capital inflows, the liquidity management with its underlying implications for inflation has been a major challenge for the policy makers. Inflation is measured by Whole-Sale Price Index (WPI) which is available on weekly basis. WPI is an economy wide index covering 435 commodities. Weights of the commodities are derived on the value of quantities traded in the domestic market.
The country at present is facing an inflation rate of 7.14 percent. Inflation in terms of Whole-sale price index started firming up from June 2006. This owed substantially to an increase in the prices of wheat, pulses and edible oils in the "primary articles" group and mineral oils in the group "fuel and power". The increase in the prices of wheat, pulses and edible oils was largely because of the shortfall in the domestic supply relative to demand and firm international prices. WPI reached a peak of 6.6 percent in March 2007 and started decelerating thereafter.
I am mainly focusing on the WPI of Primary Articles and WPI of Essential Commodities. The Primary Articles are further sub-grouped as food articles and minerals. Food articles comprises of food grains; fruits and vegetables; milk; eggs, meat and fish; condiments & spices; other food articles. The non-food articles includes- fibers, oil-seed, other non-food articles.
In case of food articles, year on year inflation decelerated to 2.1 percent in January 2008. Food articles contributed to 8.5 percent to the overall inflation and their share in the inflation of primary articles was 38.4 percent. In the current fiscal so far, food articles with an inflation of 2.7 percent contributed 13.1 percent to the overall inflation. Within food articles, milk recorded inflation of more than 6 percent. In case of 'condiments and spices' the annual inflation was 5.1 percent. In case of non-food articles, inflation was significantly higher for fibre, particularly cotton.
About 30 commodities within the whole-sale price index have been identified as essential commodities. These commodities are broadly grouped into seven categories: cereals and their products; pulses, edible oils, vegetables and spices; dairy, fisheries and animal products; tea, sugar and salt. Nearly 16 of these 30 commodities are primary articles, 12 manufactured products and 2 belong to fuel and power group. These 16 essential commodities witnessed wide fluctuations in year-on-year inflation in the last five years. The highest inflation of 28.5 percent was recorded for tur dal. An increase in rate of inflation was observed for rice (13.1%), ground nut oil (17.3%), mustard oil (11%), milk (10.9%) and salt (9.2% & 9.6% for pack and loose salt respectively).
The high rate of inflation is affecting the life of about 80 percent population of the country. The worst affected are the poor and marginals. It is now necessary for the government to take monetary measures for containing inflation for the survival of the masses. The government, both centre and the state must impose effective legislation over the hoarders of the essential commodities, limiting the storage capacities of the essential commodities, restricting the Vayada Trade of the essential commodities, keep a check on the export of the essential commodities and subsidized provision of food to the poor.
As a monetary check the Reserve Bank of India through its monetary policy can increase the Cash Reserve Ratio (CRR) for controlling the money supply in the economy. Apart from the above the government must focus on increasing the production of the agricultural produce and it must be monitored carefully so that no crop get damaged due to untimely sowing of the crop, lack of storage facilities, pollution, lack of moisture and last and not the least, the incompetent bureaucracy.
Dr Neeta Singh
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