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Representational image. (Getty Images/iStockphoto)

The inflation challenge

Any sharp inflationary spike puts a squeeze on purchasing power and demand.Unless the government acts, distress will rise, demand will dip, recovery will be harder
By HT Editorial
UPDATED ON JUL 14, 2021 04:30 PM IST

India has an inflation problem. The Consumer Price Index (CPI), India’s benchmark inflation measure, grew at 6.26% in June 2021. This is the second consecutive month that CPI has landed above the Reserve Bank of India (RBI)’s upper tolerance limit of 6%. Wholesale Price Index (WPI) grew at 12.07% in June, the third consecutive month of double-digit wholesale inflation. And the prices of fuel, largely a tax-driven phenomena currently, are at a record high. An overwhelming share of Indian workers are employed in the unorganised sector. This means that their earnings are not indexed to prices. Any sharp inflationary spike, therefore, puts a squeeze on purchasing power and demand. The rise in diesel prices will have a particularly adverse effect on farm incomes for the kharif season. The minimum support prices announced by the government were based on cost estimates, which would have escalated significantly now.

Also Read | Wholesale inflation eases to 12.07% for June, down from nearly 13% in May

This is concerning even in normal circumstances. But it is particularly so when the economy had two back-to-back pandemic-driven disruptions within a year after a prolonged slowdown. In a recent interview, RBI governor Shaktikanta Das described inflation as a transitory phenomenon. But this may not be the case. International crude oil prices are expected to stay at their current levels, maybe even rise. Unless the government cuts taxes, petrol-diesel prices will not come down. Their cascading effects will proliferate further. Inflation numbers in advanced countries will only strengthen inflationary expectations. Independent economists have warned that there could also be a rise in services inflation as restrictions are eased and demand picks up.

To be fair, RBI has its hands tied. Any movement in the direction of rolling back liquidity or raising rates will administer a demand shock to the system. The current inflationary environment is not a result of excess demand. India’s situation is precarious because it is lagging on the post-pandemic recovery curve vis-à-vis other advanced countries and China whose demand is pushing up international commodity prices. It is clear that the political executive is taking a calculated risk in flirting with inflation, although this position may change as the Uttar Pradesh elections come closer. What the government must realise is that economic variables don’t necessarily adhere to calculations based on political calendars. It must act on inflation before it causes more distress and erodes demand further, making an equitable recovery even more elusive.

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