INFLATION
- It is the rise in prices of goods and services within a particular economy wherein consumers' purchasing power decreases, and the value of the cash holdings erodes.
- In India, the Ministry of Statistics and Programme Implementation (MoSPI) measures inflation.
- Some causes that lead to inflation are demand increases, reduction in supply, demand-supply gap, excess circulation of money, increase in input costs, devaluation of the currency, and rise in wages, among others.
3. How is Food Inflation measured in India?
Food inflation in India is measured using various indices and indicators. The primary indices used to measure food inflation in India include the Consumer Price Index (CPI) and the Wholesale Price Index (WPI). Both indices provide insights into the overall price movements of goods and services, including food items, but they differ in terms of their coverage and methodology.
Consumer Price Index (CPI)
- The CPI is a key indicator used by the Government of India and the Reserve Bank of India (RBI) to monitor inflation, including food inflation.
- The CPI measures the average change over time in the prices paid by urban and rural consumers for a basket of goods and services, including food items, housing, clothing, transportation, and more.
- Within the CPI, food and beverages form a significant component, and food inflation is specifically derived from the changes in food prices within the CPI basket.
- The CPI is released monthly by the Central Statistics Office (CSO) under the Ministry of Statistics and Programme Implementation.
Wholesale Price Index (WPI)
- The WPI is another important index that tracks price changes at the wholesale level for a selected group of commodities, including food products, manufactured goods, fuel, and more.
- The WPI measures price changes from the perspective of producers and wholesalers, providing insights into inflationary pressures in the production and distribution stages.
- Food articles, such as cereals, pulses, vegetables, fruits, and edible oils, are included in the WPI basket for monitoring food inflation.
- The WPI is released weekly by the Office of Economic Adviser under the Ministry of Commerce and Industry.
In addition to these indices, other indicators such as the Food Sub-Index within the CPI and specific price indices for essential food items (like vegetables, pulses, and cereals) are also used to gauge food inflation more accurately. The RBI closely monitors food inflation trends as part of its monetary policy framework to make informed decisions regarding interest rates and economic stability. Overall, the combination of CPI, WPI, and specific food-related indices provides a comprehensive assessment of food inflation in India.
4. Headline and Core Inflation
Inflation is a key economic indicator that measures the rate at which prices of goods and services rise over time. In India, two important measures of inflation are headline inflation and core inflation.
- Headline Inflation: Headline inflation refers to the overall rate of inflation in an economy, taking into account the price changes across all goods and services included in the consumer basket. It reflects the broad-based movement in prices, including food, fuel, housing, transportation, and other essential and non-essential items. Headline inflation is typically measured using indices such as the Consumer Price Index (CPI) and the Wholesale Price Index (WPI). Fluctuations in headline inflation can be influenced by various factors, including changes in global commodity prices, government policies, supply chain disruptions, and demand-side pressures.
- Core Inflation: Core inflation, on the other hand, excludes volatile items such as food and energy from the basket of goods used to calculate inflation. By excluding these volatile components, core inflation provides a more stable measure of underlying inflationary trends in the economy. Core inflation is often considered a better gauge of long-term inflationary pressures and helps policymakers in making informed decisions regarding monetary policy. The Reserve Bank of India (RBI), for example, closely monitors core inflation to assess the underlying inflationary trends and formulate appropriate monetary policy responses.
Understanding the distinction between headline and core inflation is essential for policymakers, businesses, and consumers alike. While headline inflation provides a comprehensive view of overall price movements, core inflation offers insights into the underlying inflationary pressures, helping to distinguish between temporary fluctuations and sustained inflation trends. By closely monitoring both measures of inflation, policymakers can effectively manage inflationary risks and maintain price stability, contributing to sustainable economic growth and stability.
5. Monetary Policy Committee (MPC)
The Monetary Policy Committee (MPC) is a crucial institutional framework established by the Reserve Bank of India (RBI) to formulate and implement monetary policy decisions in India.
Role
- Formulating Monetary Policy: The primary role of the MPC is to formulate and implement monetary policy in India. This includes setting the key policy interest rates, such as the repo rate, reverse repo rate, and marginal standing facility (MSF) rate, to achieve the objectives of price stability and economic growth.
- Targeting Inflation: The MPC's main objective is to maintain price stability, which is primarily achieved by targeting a specific inflation rate. In India, the RBI has adopted a flexible inflation targeting framework, where the MPC aims to keep the Consumer Price Index (CPI) inflation within a specified target range over the medium term. Currently, the inflation target is set at 4% with a tolerance band of +/- 2%.
- Evaluating Economic Conditions: The MPC assesses various economic indicators, such as GDP growth, inflation expectations, fiscal policy measures, global economic developments, and financial market conditions, to make informed decisions about monetary policy.
- Communication: The MPC communicates its monetary policy decisions, rationale, and outlook for the economy through periodic press releases, statements, and the publication of meeting minutes. This transparency enhances predictability and credibility in monetary policy.
Composition
- Members: The MPC consists of six members, including three members nominated by the Government of India and three members from the Reserve Bank of India. The Governor of the RBI serves as the ex-officio Chairperson of the MPC.
- Appointment: The members of the MPC are appointed by the Central Government based on their expertise and experience in economics, banking, finance, or related fields. The RBI Governor and Deputy Governor (in charge of monetary policy) are automatic members of the MPC.
- Voting Rights: Each member of the MPC, including the RBI Governor, has one vote in the decision-making process. Decisions are made by a majority vote, with the Governor having the casting vote in case of a tie.
- Terms: Members of the MPC serve fixed terms, typically for four years, with eligibility for reappointment. This ensures continuity and stability in monetary policy formulation.
6. The Way Forward
By implementing the measures and fostering collaborative efforts among policymakers, regulators, and stakeholders, India can effectively manage inflationary pressures, maintain price stability, and promote sustainable economic growth and development.
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For Prelims: Inflation, MPC, CPI, WPI, food Inflation, RBI, Headline inflation, Core inflation For Mains:
1. Explain the concept of inflation and its impact on an economy. Discuss the various causes of inflation and the measures that can be taken to control it, with specific reference to India. (250 Words)
2. What are the challenges and opportunities associated with managing inflation in India? Evaluate the effectiveness of recent policy measures in addressing inflationary pressures and maintaining price stability. Suggest strategies for sustainable economic growth while managing inflation risks. (250 Words)
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Previous Year Questions
1. Consider the following statements: (UPSC 2021)
1. The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.
2. Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in the public interest.
3. The Governor of the RBI draws his natural power from the RBI Act.
Which of the above statements is/are correct?
A. 1 and 2 only B. 2 and 3 only C. 1 and 3 only D. 1, 2 and 3
2. Concerning the Indian economy, consider the following: (UPSC 2015)
Which of the above is/are component(s) of Monetary Policy? (a) 1 only (b) 2, 3 and 4 (c) 1 and 2 (d) 1, 3 and 4
3. An increase in Bank Rate generally indicates: (UPSC 2013) (a) Market rate of interest is likely to fall.
(b) Central bank is no longer making loans to commercial banks.
(c) Central bank is following an easy money policy.
(d) Central bank is following a tight money policy.
4. Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)? (UPSC 2017) 1. It decides the RBI's benchmark interest rates.
2. It is a 12-member body including the Governor of RBI and is reconstituted every year.
3. It functions under the chairmanship of the Union Finance Minister.
Select the correct answer using the code given below: A. 1 only B. 1 and 2 only C. 3 only D. 2 and 3 only 5. Read the following passage and answer the question that follows. Your answers to these items should be based on the passage only.
Policymakers and media have placed the blame for skyrocketing food prices on a variety of factors, including high fuel prices, bad weather in key food producing countries, and the diversion of land to non-food production. Increased emphasis, however, has been placed on a surge in demand for food from the most populous emerging economics. It seems highly probable that mass consumption in these countries could be well poised to create a food crisis.
With reference to the above passage, the following assumptions have been made: (UPSC 2021)
1. Oil producing countries are one of the reasons for high food prices.
2. If there is a food crisis in the world in the near future, it will be in the emerging economies. Which of the above assumptions is/are valid?
A. 1 only B. 2 only C. Both 1 and 2 D. Neither 1 nor 2
6. India has experienced persistent and high food inflation in the recent past. What could be the reasons? (UPSC 2011)
1. Due to a gradual switchover to the cultivation of commercial crops, the area under the cultivation of food grains has steadily decreased in the last five years by about 30.
2. As a consequence of increasing incomes, the consumption patterns of the people have undergone a significant change.
3. The food supply chain has structural constraints.
Which of the statements given above are correct?
A. 1 and 2 only B. 2 and 3 only C. 1 and 3 only D. 1, 2 and 3
7. With reference to inflation in India, which of the following statements is correct? (UPSC 2015)
A. Controlling the inflation in India is the responsibility of the Government of India only
B. The Reserve Bank of India has no role in controlling the inflation
C. Decreased money circulation helps in controlling the inflation
D. Increased money circulation helps in controlling the inflation
8. With reference to the Agreement at the UNFCCC Meeting in Paris in 2015, which of the following statements is/are correct? (UPSC 2016)
1. The Agreement was signed by all the member countries of the UN and it will go into effect in 2017
2. The Agreement aims to limit greenhouse gas emissions so that the rise in average global temperature by the end of this century does not exceed 2°C or even 1.5°C above pre-industrial levels.
3. Developed countries acknowledged their historical responsibility in global warming and committed to donate $ 1000 billion a year from 2020 to help developing countries to cope with climate change.
Select the correct answer using the code given below:
A. 1 and 3 only B. 2 only C. 2 and 3 only D. 1, 2 and 3
Answers: 1-C, 2-C, 3-D, 4-A, 5-D, 6-B, 6-C, 7-B
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