RETAIL INFLATION
1. Context
Retail inflation inched up to 3.4% in March from 3.21% February, mainly due to an uptick in prices of certain food items, show data released on Monday. The food inflation, based on the consumer price index (CPI), was estimated at 3.87% as against 3.47% in February. This remains below the Reserve Bank of India’s median target of 4%.
2. What is 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. Retail Inflation
Consumers often directly buy from retailers. So, the inflation experienced at retail reflects the actual price rise in the country. It also shows the cost of living better. In India, the index that reflects the inflation rate at the retail level is known as Consumer Price Index (CPI). Unlike WPI, CPI includes both goods and services. CPI is used to calculate the Dearness Allowance (DA) for government employees.
4. How Inflation is measured?
- In India, inflation is primarily measured by two main indices- WPI (Wholesale Price Index) and CPI (Consumer Price Index), Which measures Wholesale and retail-level price changes, respectively.
- The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics, etc, which Indian consumers buy for use.
- On the other hand, the goods or services sold by businesses to smaller businesses for selling further are captured by the WPI.
- Both WPI (Wholesale Price Index) and CPI (Consumer Price Index) are used to measure inflation in India.
5. What is the Inflation Target?
- Under Section 45ZA, in consultation with the RBI Act, the Central Government determines the inflation target in terms of the Consumer Price Index (CPI), once in five years and notifies it in the Official Gazette.
- Accordingly, on August 5, 2016, the Central Government notified in the Official Gazette 4 percent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016, to March 31, 2021, with the upper tolerance limit of 6 percent and the lower tolerance limit of 2 percent.
- On March 31, 2021, the Central Government retained the inflation target and the tolerance band for the next 5-year period-April 1, 2021 to March 31, 2026.
- Section 45ZB of the RBI Act provides for the constitution of a six-member Monetary Policy Committee (MPC) to determine the policy rate required to achieve the inflation target.
6. Monetary Policy Committee (MPC)
- The MPC is a statutory and institutionalized framework under the RBI Act, of 1934, for maintaining price stability, keeping in mind the objective of growth. It was created in 2016.
- It was created to bring transparency and accountability in deciding monetary policy.
- MPC determines the policy interest rate required to achieve the inflation target.
- The committee comprises six members and Governor RBI acts as an ex-officio chairman. Three members are from RBI and three are selected by the government. The inflation target is to be set once every five years. It is set by the Government of India, in consultation with the Reserve Bank of India.
- The current inflation target is pegged at 4% with -2/+2 tolerance till March 31, 2021.
7. What Caused the drop in Inflation?
- Retail Inflation or price gains based on the Consumer Price Index, slowed to 6.77 % last month, from September's 7.41%, aided by an appreciable deceleration in food price inflation.
- The year-on-year inflation based on the Consumer Food Price Index eased by almost 160 basis points in October, to 7.01%, from the preceding month's 8.60%, helped by a 'decline in prices of vegetables, fruits, pulses and oils, and fats', the Government said.
- With the food and beverages sub-index representing almost 46% of the CPI's weight, the slowdown in food price gains understandably steered overall inflation lower even as price gains in three other essential categories, namely clothing, and footwear, housing, and health remained either little changed from September or quickened.
- Inflation at the Wholesale Prices Level also continued to decelerate, with the headline reading easing into single digits for the first time in 19 months. A favorable base effect along with a distinct cooling in international prices of commodities including crude oil and steel amid gathering uncertainty in advanced economies was largely instrumental in tempering wholesale price gains.
8. Recent Measures by the Government
To soften the prices of edible oils and pulses, tariffs on imported items have been rationalized from time to time. The stock limits on edible oils are also maintained, to avoid hoarding.
The Government has taken trade-related measures on wheat and rice to keep domestic supplies steady and curb the rise in prices.
The impact of these measures is expected to be felt more significantly in the coming months.
For Prelims & Mains
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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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Source: The Hindu
NON BANKING FINANCIAL COMPANIES (NBFC)
1. Context
The Reserve Bank of India’s draft guidelines for NBFC Upper Layer (NBFC-UL) entities mark a significant shift in regulatory framework, moving away from a complex parametric scoring system to a more straightforward asset-size-based classification.
2. What are the non-banking financial companies (NBFCs)?
- Non-Banking Financial Companies (NBFCs) are financial institutions that provide banking services but do not hold a banking license.
- They are crucial to the financial system as they cater to the financial needs of sectors where traditional banks may not reach or provide services.
- NBFCs offer various financial services such as loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority, leasing, hire-purchase, insurance business, chit business, etc.
- They differ from traditional banks because they cannot accept demand deposits and do not form part of the payment and settlement system like banks do.
- However, they play a significant role in providing credit to individuals, small businesses, and the unorganised sector, thereby contributing to financial inclusion and economic growth. Examples of NBFCs include companies engaged in equipment leasing, hire-purchase finance, vehicle finance, and microfinance
3. Classification of NBFCs
NBFCs can be classified into various categories based on their activities, ownership structure, and regulatory requirements.
Here are some common classifications:
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Asset Financing NBFCs: These NBFCs primarily provide financing for the purchase of assets such as vehicles, machinery, equipment, etc.
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Investment and Credit NBFCs: These NBFCs primarily make investments in securities or extend credit facilities.
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Infrastructure Finance Companies (IFCs): These NBFCs focus on financing infrastructure projects such as roads, ports, power, telecommunications, etc.
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Housing Finance Companies (HFCs): These NBFCs specialize in providing finance for housing and related activities.
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Microfinance Institutions (MFIs): These NBFCs provide financial services, including small loans, savings, and insurance, to low-income individuals and microenterprises.
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Non-Deposit Taking NBFCs: These NBFCs do not accept deposits from the public. They rely on other sources of funding such as borrowings from banks, financial institutions, and capital markets.
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Deposit Taking NBFCs: These NBFCs accept deposits from the public and are regulated more closely, similar to banks, to ensure the safety of depositor funds.
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Systemically Important NBFCs (SI-NBFCs): These are NBFCs whose failure could potentially disrupt the financial system. They are subject to additional regulatory requirements to mitigate systemic risks.
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Core Investment Companies (CICs): These NBFCs are primarily engaged in the business of acquisition of shares and securities and hold not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, bonds, debentures, debt, or loans in group companies.
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Infrastructure Debt Funds (IDFs): These NBFCs are set up to facilitate the flow of long-term debt into infrastructure projects.
4. What is the 50-50 Criteria of Principal Business?
- The 50-50 criteria of principal business refers to a regulatory guideline set by the Reserve Bank of India (RBI) for determining whether a company's principal business is that of a Non-Banking Financial Company (NBFC).
- According to this criterion, if more than 50% of a company's total assets or gross income comes from financial assets or income derived from financial assets, it is considered to be primarily engaged in the business of an NBFC. In other words, if at least 50% of the company's assets or income is from financial activities, it falls under the purview of NBFC regulations.
- This guideline helps to differentiate between companies engaged primarily in non-financial activities with some incidental financial activities and those whose main business revolves around financial services, thereby ensuring appropriate regulation and supervision of NBFCs by the RBI. It is an important criterion used by regulators to determine the regulatory classification of companies operating in the financial sector
5.RBI rules on Non Banking Financial Companies
The Reserve Bank of India (RBI) regulates Non-Banking Financial Companies (NBFCs) in India to ensure financial stability, consumer protection, and the smooth functioning of the financial system.
Some of the key rules and regulations imposed by the RBI on NBFCs include:
- NBFCs need to obtain a Certificate of Registration (CoR) from the RBI to commence or carry on the business of non-banking financial institution.
- RBI imposes prudential regulations on NBFCs to ensure the safety and soundness of their operations. These norms cover aspects such as capital adequacy, income recognition, asset classification, provisioning, liquidity management, and exposure limits.
- NBFCs are required to adhere to a Fair Practices Code (FPC) prescribed by the RBI, which outlines the principles of transparency, fairness, and responsible lending practices.
- NBFCs are mandated to follow KYC norms while onboarding customers, including verification of identity, address, and other relevant information, to prevent money laundering and terrorist financing activities
- NBFCs are required to implement effective AML/CFT measures, including customer due diligence, transaction monitoring, and reporting of suspicious transactions, to mitigate the risks of money laundering and terrorist financing.
- RBI mandates NBFCs to adhere to good corporate governance practices, including the composition of the board of directors, risk management framework, internal controls, and disclosure requirements
- NBFCs are required to have robust risk management systems in place to identify, assess, monitor, and mitigate various risks such as credit risk, market risk, liquidity risk, and operational risk.
- NBFCs need to submit various regulatory returns and reports to the RBI periodically, providing details of their financial performance, capital adequacy, asset quality, and compliance with regulatory requirements.
- RBI conducts regular inspections and supervisory reviews of NBFCs to assess their financial health, compliance with regulations, and adherence to best practices.
- RBI has the authority to issue directions, impose restrictions, and take corrective actions against NBFCs that fail to comply with regulatory requirements or pose risks to the financial system.
6. Way Forward
Non-Banking Financial Companies (NBFCs) play a vital role in India's financial landscape, serving as critical intermediaries between traditional banking institutions and underserved segments of the economy. With their diverse range of financial services and flexible approach to lending, NBFCs contribute significantly to promoting financial inclusion, fostering entrepreneurship, and driving economic growth. However, the regulatory framework governing NBFCs remains paramount in ensuring the stability and integrity of the financial system. As the sector continues to evolve and face new challenges, effective regulation, prudent risk management, and adherence to best practices will be essential for NBFCs to sustain their growth trajectory and fulfill their socio-economic mandate in a responsible and sustainable manner
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For Prelims: Economy
For Mains: GS-III: Indian Economy and issues relating to planning, mobilisation, of resources, growth, development, and employment.
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Previous Year Questions 1.The RBI acts as a bankers’ bank. This would imply which of the following? (UPSC CSE 2012) 1. Other banks retain their deposits with the RBI. 2. The RBI lends funds to the commercial banks in times of need. 3. The RBI advises the commercial banks on monetary matters. Select the correct answer using the codes given below : (a) 2 and 3 only (b) 1 and 2 only (c) 1 and 3 only (d) 1, 2 and 3 Answer (d)
The central bank, also known as the apex bank, has overarching control over a nation's banking system. It holds the exclusive authority for issuing currency and regulates the money supply within the economy. As outlined in the Reserve Bank of India Act, 1934, the central bank fulfills several key functions:
2.With reference to the Non-banking Financial Companies (NBFCs) in India, consider the following statements: (UPSC CSE 2010)
Which of the statements given above is/are correct? (a) 1 only Answer: (b)
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Source: Indianexpress
FEMALE LABOUR FORCE PARTICIPATION RATE (FLPR)
1. Context
Delhi is among India’s most educated cities for women. And yet, it is also one in which their workforce participation is the least, much lower than the national average of about 35 per cent.
2. What is the female labour force participation rate (FLPR)?
- The Female Labour Force Participation Rate (FLPR) is a crucial economic indicator that measures the percentage of women who are either employed or actively seeking work in relation to the total working-age female population. This metric helps assess the extent to which women are integrated into the workforce and their role in economic development.
- To calculate FLPR, one considers both employed women and those who are unemployed but actively looking for jobs. This figure is then divided by the total number of working-age women (typically aged 15 and above) and expressed as a percentage. A high FLPR suggests that a large proportion of women are engaged in economic activities, whereas a low FLPR indicates limited workforce participation.
- FLPR is significant as it reflects not only gender equality in employment but also the overall economic productivity of a country. When more women participate in the workforce, economic output rises, and household incomes improve. Moreover, a higher FLPR is often linked to greater social progress, as it reflects better access to education and employment opportunities for women.
- In India, the female labour force participation rate has seen considerable fluctuations over the years. The highest recorded FLPR was 40.8% in 2004-05, after which it witnessed a sharp decline.
- Various factors contributed to this trend, including societal norms that discourage female employment, lack of job opportunities in the formal sector, and a rise in household incomes that reduced the economic necessity for women to work. Additionally, many women opted to pursue higher education, further delaying their entry into the workforce.
- The lack of sufficient opportunities in industries such as manufacturing and services limits the potential for further growth in FLPR. Addressing these challenges requires policy interventions, such as skill development programs, improved childcare support, and greater access to formal employment opportunities for women.
- Thus, while the rise in FLPR in recent years is encouraging, sustained efforts are needed to ensure that women's participation in the labour force is not only increased but also leads to better economic and social outcomes
3. Statistics on female labour force participation rate
- India's female workforce participation rate peaked at 40.8% in 2004-05 but has experienced a decline in the years since. However, beginning in 2017, the Female Labour Force Participation Rate (FLPR) has shown a gradual upward trend, reversing the previous decline.
- This increase has become particularly evident in the years following the COVID-19 pandemic. In rural areas, FLPR rose from 41.5% in 2022-23 to 47.6% in 2023-24, while in urban areas, it increased from 25.4% to 28% over the same period.
- The resurgence in FLPR can be attributed to the economic recovery post-lockdown, which encouraged many women who were previously not part of the workforce to seek employment.
- Additionally, economic hardships have also played a role, compelling more women to enter the labour market in search of income.
- The increasing presence of women in India’s labour force, often referred to as the feminisation of the workforce, requires a more in-depth analysis. The recent rise in FLPR has been largely driven by a surge in self-employment, particularly in agriculture.
- State-wise census data suggests that in regions where women’s participation in the workforce has increased, it is primarily due to their growing involvement in agricultural activities.
- This trend underscores a significant concern—the limited availability of non-agricultural job opportunities for women. In rural areas, employment prospects for women remain largely restricted to agricultural work, highlighting the lack of diverse and stable employment options in other sectors
4. Feminisation of agriculture
- This phenomenon results in the feminisation of agriculture, a concept that economic studies define in two primary ways. Firstly, it signifies a growing share of agricultural work being performed by women, encompassing their expanding roles as smallholder cultivators or casual agricultural wage laborers.
- Secondly, feminisation of agriculture extends beyond labour participation to women’s control and ownership of agricultural resources, as well as their involvement in key decision-making processes. This includes land ownership, land rights, and authority over farm-related choices, such as crop selection and the use of agricultural inputs like fertilizers.
- Several underlying factors have contributed to this shift. The structural transformation of India’s economy has led to a declining contribution of agriculture to the country’s GDP, with employment shifting towards the service sector.
- Additionally, economic distress in rural areas has prompted men to migrate in search of non-agricultural employment, leaving women to take on increased responsibilities in farming.
- Other contributing factors include declining agricultural productivity, rising input costs, climate-related risks, and limited employment opportunities in rural areas. Furthermore, as rural youth—especially those with formal education—aspire for non-farm jobs, male migration from villages has accelerated, placing a greater burden on women to manage agricultural activities
5. Land Ownership and Gender disparity
- The 2005 report by the National Commission on Farmers highlighted a growing trend of women engaging in agricultural activities, including land management and assisting in farm operations.
- Estimates suggest that women contribute nearly 80% of agricultural labor in India and constitute over 42% of the total agricultural workforce. Recent PLFS 2023-24 data further reveals that 76.95% of rural women are employed in agriculture, underscoring their significant role in the sector.
- Despite their extensive contributions, women in agriculture remain largely unrecognized. Findings from the 2015-16 Agriculture Census indicate that while 73% of rural female workers are involved in farming, they control only 11.72% of the total cultivated land.
- This stark contrast highlights gender inequality in land ownership and decision-making. Moreover, most female-owned landholdings are small and marginal, a consequence of historical disparities in land distribution.
- In India, women can obtain land through inheritance, gifts, purchases, or government allocations. However, these avenues often do not guarantee equal access, as financial limitations make it harder for women to buy land, leaving inheritance as a primary means of ownership. Nonetheless, social and cultural barriers continue to hinder their ability to inherit and manage land independently.
- A relevant example is the 2017 land distribution initiative in Uttar Pradesh, where 331 landless households in Mirzapur district were granted land titles. In Sirsi village, 80 titles were distributed, of which only eight went to single women, while in Karkad, out of 251 titles, just 16 were allotted to single women.
- This means that only 7% of the total land titles were allocated to single women, reflecting the persistent gender gap in land ownership. Studies emphasize that securing land rights is crucial for women’s financial stability and their ability to make independent economic decisions
6. Gender equality in agriculture's journey
- It is often emphasized that a woman’s participation in paid employment should not automatically be equated with empowerment. Many women experience a “double burden”, where they must juggle paid work alongside unpaid domestic duties and caregiving responsibilities. Similarly, merely being engaged in agricultural activities does not necessarily lead to their empowerment.
- India’s agrarian economy has been facing financial distress, with declining agricultural incomes. As a result, women’s increased participation in farming may not translate into economic empowerment, especially in the absence of stable non-agricultural job opportunities. Studies also suggest that women have limited decision-making authority over crucial aspects such as fertilizer use, household assets, and alternative sources of livelihood.
- The concept of feminisation of agriculture is frequently discussed alongside the feminisation of poverty and agrarian distress.
- As men migrate to urban areas or other sectors for better employment opportunities, women are often left with no choice but to take up farming, which is typically perceived as a less profitable livelihood option.
- Additionally, gender disparities in land ownership prevent many female farmers from accessing credit, financial resources, and government assistance. Without legal ownership of land, they struggle to qualify for schemes such as the Kisan Credit Card or the Pradhan Mantri Kisan Samman Nidhi Yojana.
- The widespread perception of farmers as predominantly male further contributes to the marginalization of women in the agricultural sector.
- Agriculture involves more than just sowing and harvesting—it requires investment, resource management, and decision-making.
- Therefore, achieving gender equity in agriculture necessitates policies that prioritize women’s inclusion, equitable land distribution, improved access to agricultural technology, and gender-sensitive climate adaptation strategies.
- Recognizing women as central stakeholders in agriculture will be key to their economic empowerment and long-term progress
7. Way Forward
Addressing these issues requires a multi-dimensional approach that ensures equal land rights, financial inclusion, access to technology, and policy frameworks that recognize women as key agricultural stakeholders. Empowering female farmers is not just about increasing their participation in agriculture but also about providing them with the resources, rights, and recognition needed to transform their roles from laborers to decision-makers and landowners. By implementing gender-responsive agricultural policies, improving access to credit, and breaking societal stereotypes, India can move toward a more equitable and sustainable agrarian economy where women play a central and empowered role
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For Prelims: Periodic Labour Force Survey, National Sample Survey Office, labour force participation rate, worker population ratio
For Mains:
1. Examine the changing nature of employment in India, as reflected in the increasing share of self-employment and the declining proportion of regular salaried jobs. Discuss the implications of this shift for the quality and sustainability of employment. (250 Words)
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Previous Year Questions 1. Given below are two statements, one is labeled as Assertion (A) and the other as Reason (R). (UPPSC 2019)
Assertion (A): The labour force participation rate is falling sharply in recent years for females in India.
Reason (R): The decline in labour force participation rate is due to improved family income and an increase in education.
Select the correct answer from the codes given below:
Codes:
A. Both (A) and (R) are true and (R) is the correct explanation of (A)
B. Both (A) and (R) are true and (R) is not the correct explanation of (A)
C. (A) is true, but (R) is false
D. (A) is false, but (R) is true
2. Which of the following statements about the employment situation in India according to the periodic Labour Force Survey 2017-18 is/are correct? (UPSC CAPF 2020)
1. Construction sector gave employment to nearly one-tenth of the urban male workforce in India
2. Nearly one-fourth of urban female workers in India were working in the manufacturing sector
3. One-fourth of rural female workers in India were engaged in the agriculture sector
Select the correct answer using the code given below:
A. 2 only B. 1 and 2 only C. 1 and 3 only D. 1, 2 and 3
3. Disguised unemployment generally means (UPSC 2013)
(a) large number of people remain unemployed
4. Assertion (A): Workers - population ratio in India is low in contrast to that in developed countries. Reason (R): Rapid growth of population, low female worker population rate and omission of unpaid family workers lead to low worker-population ratio. Choose the correct answer: (Telangana Police SI Mains 2018) A. (A) is true, but (R) is false.
B. (A) is false, but (R) is true.
C. Both (A) and (R) are true, but (R) is not a correct explanation of (A).
D. Both (A) and (R) are true, but (R) is the correct explanation of (A).
Answers: 1-C, 2-B, 3-C, 4-D Mains1. Most of the unemployment in India is structural in nature. Examine the methodology adopted to compute unemployment in the country and suggest improvements. (UPSC 2023) |
Source: Indianexpress
CONSUMER FOOD PRICE INDEX (CFPI)
1. Context
On July 11, 2008, when Brent crude prices hit an all-time-high of $147.5 a barrel, the world experienced not just fuel inflation.
2. What is Food inflation?
Food inflation refers to the rise in the prices of food items over a period of time. This increase in prices can occur due to various factors and has significant implications for both consumers and the economy as a whole.
Food inflation is usually measured using food price indices, which track the changes in prices of a basket of food items over time. In India, for example, food inflation is a significant component of the Consumer Price Index (CPI)
Causes of Food Inflation:
Supply-Side Factors:
- Poor Harvests: Bad weather conditions such as droughts, floods, or other natural disasters can lead to crop failures, reducing the supply of food items and driving up prices.
- Input Costs: Rising costs of inputs like seeds, fertilizers, and fuel can increase the cost of food production, which is then passed on to consumers.
- Supply Chain Disruptions: Issues in transportation, storage, or distribution can reduce the availability of food in markets, leading to price increases
Demand-Side Factors:
- Population Growth: An increasing population leads to higher demand for food, which can drive up prices if the supply doesn't keep pace.
- Income Growth: As incomes rise, especially in developing countries, there is often a shift towards more expensive, protein-rich foods, which can lead to higher demand and prices
3. What is the consumer food price index (CFPI)?
- The Consumer Food Price Index (CFPI) is a specific measure used to track the changes in the prices of food items consumed by households over time. It is a subset of the broader Consumer Price Index (CPI) and is particularly focused on food-related inflation
- The CFPI is designed to measure the average change over time in the prices paid by consumers for a fixed basket of food items. This index helps in understanding food inflation specifically, as opposed to general inflation
- The CFPI is calculated based on the prices of these food items collected from various regions and markets. The prices are then averaged and compared to a base year to determine the percentage change, which reflects food inflation.
- The weights assigned to different food categories in the CFPI are based on their importance in the average consumer’s food consumption basket
- Like the CPI, the CFPI is anchored to a base year, which is periodically updated to reflect changes in consumption patterns and economic conditions. The base year serves as a reference point for measuring price changes
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Components:
In India, the CFPI is released by the Ministry of Statistics and Programme Implementation (MoSPI) as part of the monthly CPI data. It plays a significant role in understanding the dynamics of food inflation in the country, given the large population and significant share of food in household consumption
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4. How is food inflation impacting the overall health of the economy?
Food inflation has a broad impact on the overall health of an economy, influencing both macroeconomic stability and the well-being of individuals. Here’s a detailed analysis of how food inflation affects different aspects of the economy:
Impact on Consumers and Households:
- As food prices rise, households have to spend a larger share of their income on food, leaving less for other essential goods and services. This reduction in purchasing power particularly affects low-income households, leading to decreased overall consumption.
- Higher food prices can push more people into poverty, especially in developing countries where food constitutes a significant portion of household expenditures. This can exacerbate income inequality and social unrest.
- Persistent food inflation can lead to malnutrition and food insecurity, as people may be forced to opt for cheaper, less nutritious food. This has long-term health implications, particularly for children, potentially leading to increased healthcare costs and lower productivity in the future.
Impact on Inflation and Monetary Policy:
- Food inflation is a key driver of overall inflation, particularly in economies where food prices have a significant weight in the Consumer Price Index (CPI). High food inflation can lead to higher headline inflation, affecting economic stability.
- Central banks may respond to rising food inflation by tightening monetary policy (e.g., raising interest rates) to control inflation. While this can help curb inflation, it can also slow down economic growth by increasing borrowing costs and reducing investment.
Impact on Economic Growth:
- As more household income is diverted towards food, there is less spending on other goods and services, which can dampen overall economic growth. This reduction in demand can particularly hurt sectors like retail, entertainment, and durable goods.
- High food prices can lead to increased wage demands as workers seek to maintain their purchasing power. This can raise production costs across various sectors, potentially leading to reduced profitability and lower investment.
- While food inflation might benefit farmers in the short term through higher prices for their produce, it can also lead to higher input costs (e.g., for seeds, fertilizers, and transportation). Additionally, if inflation is driven by supply-side constraints like poor harvests, the overall output of the agricultural sector may decline, harming rural economies.
Impact on Government Fiscal Policy:
- To shield consumers from the effects of rising food prices, governments may increase subsidies on essential food items. While this can provide short-term relief, it can strain public finances and lead to higher fiscal deficits.
- Governments might need to increase spending on social welfare programs, such as food distribution schemes or direct cash transfers, to support vulnerable populations. This can further pressure government budgets.
- Persistent food inflation can lead to public discontent, protests, and political instability, especially in countries where food security is a major issue. Governments may face pressure to intervene in markets, which can sometimes lead to distortions and long-term inefficiencies.
Global Impact:
- Countries that rely heavily on food imports may experience worsening trade balances as food prices rise. This can lead to a depreciation of the national currency, further exacerbating inflation and reducing competitiveness in global markets.
- In an interconnected global economy, food inflation in one country can spill over into others, particularly in regions that share trade links or common agricultural markets.
5. Way Forward
Food inflation is the result of a interplay of supply and demand factors, global influences, and government policies. While some causes, like poor harvests or global price fluctuations, may be temporary, others, such as climate change and structural inefficiencies, are more persistent and challenging to address. Effective management of food inflation requires a multi-faceted approach, involving improvements in agricultural productivity, better supply chain management, and thoughtful government interventions
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For Prelims: Current events of national and international importance
For Mains: GS III - Indian Economy
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Previous Year Questions
1.Consider the following statements: (UPSC CSE 2020)
Which of the statements given above is/are correct? (a) 1 and 2 only Answer (a)
Mains 1.There is also a point of view that Agricultural Produce Market Committees (APMCs) set up under the State Acts have not only impeded the development of agriculture but also have been the cause of food inflation in India. Critically examine. (2014) |
Source: Indianexpress
LONG-PERIOD AVERAGE (LPA)
1. Context
The 2026 southwest monsoon seasonal (June to September) rainfall over the country is most likely to be below normal (95-90% of the Long Period Average (LPA)
2. About Long Period Average (LPA)
- The IMD predicts a “normal”, “below normal”, or “above normal” monsoon in relation to a benchmark “long period average” (LPA)
- According to the IMD, the “LPA of rainfall is the rainfall recorded over a particular region for a given interval (like month or season) average over a long period like 30 years, 50 years, etc”
- The IMD’s prediction of a normal monsoon on Thursday was based on the LPA of the 1971-2020 period, during which India received 87 cm of rain for the entire country on average
- The IMD has in the past calculated the LPA at 88 cm for the 1961-2010 period, and at 89 cm for the period 1951-2000
- While this quantitative benchmark refers to the average rainfall recorded from June to September for the entire country, the amount of rain that falls every year varies from region to region and from month to month
- Therefore, along with the countrywide figure, the IMD also maintains LPAs for every meteorological region of the country this number ranges from around 61 cm for the drier Northwest India to more than 143 cm for the wetter East and Northeast India
- LPA of the southwest monsoon rainfall over Kerala: 556 mm, 659 mm, 427 mm and 252 mm for the months of June, July, August, and September respectively
- Broken down monthwise for the entire country, the LPA figures for the season are 16.36 cm for June, 28.92 cm for July, 26.13 cm for August, and 17.34 cm for September
3. Need of LPA
- The IMD records rainfall data at more than 2,400 locations and 3,500 rain-gauge stations
- Because annual rainfall can vary greatly not just from region to region and from month to month, but also from year to year within a particular region or month, an LPA is needed to smooth out trends so that a reasonably accurate prediction can be made
- A 50-year LPA covers for large variations in either direction caused by freak years of unusually high or low rainfall (as a result of events such as El Nino or La Nina)
- As well as for the periodic drought years and the increasingly common extreme weather events caused by climate change
4.IMD Calculations
Quantitatively, the monsoon seasonal (June to September) rainfall is likely to be 99% of the LPA with a model error of ± 5%. The LPA of the season rainfall over the country as a whole for the period 1971-2020 is 87 cm
The IMD maintains five rainfall distribution categories on an all-India scale. These are:
- Normal or near normal, when the percentage departure of actual rainfall is +/-10% of LPA, that is, between 96-104% of LPA
- Below normal, when departure of actual rainfall is less than 10% of LPA, that is 90-96% of LPA
- Above normal, when actual rainfall is 104-110% of LPA
- Deficient, when departure of actual rainfall is less than 90% of LPA
- Excess, when the departure of actual rainfall is more than 110% of LPA
5. About India Meteorological Department
- The beginnings of meteorology in India can be traced to ancient times. Early philosophical writings of the 3000 B.C. era, such as the Upanishadas, contain serious discussion about the processes of cloud formation and rain and the seasonal cycles caused by the movement of earth round the sun
- Varahamihira's classical work, the Brihatsamhita, written around 500 A.D., provides a clear evidence that a deep knowledge of atmospheric processes existed even in those times
- It was understood that rains come from the sun (Adityat Jayate Vrishti) and that good rainfall in the rainy season was the key to bountiful agriculture and food for the people
- Kautilya's Arthashastra contains records of scientific measurements of rainfall and its application to the country's revenue and relief work. Kalidasa in his epic, 'Meghdoot', written around the seventh century, even mentions the date of onset of the monsoon over central India and traces the path of the monsoon clouds
- Meteorology, as we perceive it now, may be said to have had its firm scientific foundation in the 17th century after the invention of the thermometer and the barometer and the formulation of laws governing the behaviour of atmospheric gases
- It was in 1636 that Halley, a British scientist, published his treatise on the Indian summer monsoon, which he attributed to a seasonal reversal of winds due to the differential heating of the Asian land mass and the Indian Ocean
- India is fortunate to have some of the oldest meteorological observatories of the world. The British East India Company established several such stations, for example, those at Calcutta in 1785 and Madras (now Chennai) in 1796 for studying the weather and climate of India
- The Asiatic Society of Bengal founded in 1784 at Calcutta, and in 1804 at Bombay (now Mumbai), promoted scientific studies in meteorology in India
- A disastrous tropical cyclone struck Calcutta in 1864 and this was followed by failures of the monsoon rains in 1866 and 1871
- In the year 1875, the Government of India established the India Meteorological Department, bringing all meteorological work in the country under a central authority
- The first Director General of Observatories was Sir John Eliot who was appointed in May 1889 at Calcutta headquarters
- The headquarters of IMD were later shifted to Shimla, then to Poona (now Pune) and finally to New Delhi
- From a modest beginning in 1875, IMD has progressively expanded its infrastructure for meteorological observations, communications, forecasting and weather services and it has achieved a parallel scientific growth
- IMD has always used contemporary technology. In the telegraph age, it made extensive use of weather telegrams for collecting observational data and sending warnings
- Later IMD became the first organisation in India to have a message-switching computer for supporting its global data exchange.
- One of the first few electronic computers introduced in the country was provided to IMD for scientific applications in meteorology
- India was the first developing country in the world to have its own geostationary satellite, INSAT, for continuous weather monitoring of this part of the globe and particularly for cyclone warning
- IMD has continuously ventured into new areas of application and service and steadily built upon its infrastructure in its history of 140 years
- It has simultaneously nurtured the growth of meteorology and atmospheric science in India. Today, meteorology in India is poised at the threshold of an exciting future
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For Prelims: IMD, Long Period Average, El Nino, La Nino
For Mains: 1.What characteristics can be assigned to monsoon climate that succeeds in feeding more than 50 percent of the won population residing in Monsoon Asia? (UPSC GS 1 2017
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Previous Year Questions:
1.La Nina is suspected to have caused recent floods in Australia. How is La Nina different from El Nino? (UPSC 2011 )
A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2
Answer (D)
2.The seasonal reversal of winds is the typical characteristic of (UPSC 2014 )
A. Equatorial climate
B. Mediterranean climate
C. Monsoon climate
D. All of the above climates
Answer (C)
3.With reference to ‘Indian Ocean Dipole (IOD)’ sometimes mentioned in the news while forecasting Indian monsoon, which of the following statements is/are correct? (2017 Prelims)
A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2
Answer (B)
4.Consider the following statements: (2015)
A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2
Answer (B)
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Source: India Meteorological Department, indianexpress
