Food Inflation in India

What’s in today’s article?

• Why in News?
• What is Inflation?
• Measuring Food Inflation in India
• What is Wholesale Price Index?
• How is WPI calculated?
• Major Components of WPI
• What are Headline and Core Inflation?
• What is the Major Difference Between WPI and CPI?
• Why Reserve Bank of India Adopted CPI over WPI?
• Role of Monetary Policy Committee
• Composition of the MPC

Why in News?

• The consumer food prices were 9.9% higher in August, 2023 in comparison to the same month of the previous year.
• The overall retail inflation with 6.8% is well above its target of 4% and upper tolerance limit of 6%.

What is Inflation?

• Inflation is basically the general rise in the price of goods and services and the decline in purchasing power of people.
• This means that when inflation rises (without an equivalent rise in your income), you are able to buy lesser things than you could buy previously, or you have to pay more money for the same stuff now.
• A “rising” inflation rate implies that the rate (at which the prices rise) itself is increasing.
• In other words, imagine a scenario where the inflation rate was 1% in March, 2% in April and then 4% in May and 7% in June.

Measuring Food Inflation in India

• Any price index can in principle be calculated using producer, consumer, or wholesale prices, with each serving a different purpose.
• The producer price index measures the average selling prices received by domestic producers of goods and services.
• This contrasts with other inflation measures, such as the consumer price index (CPI) which measures average prices from the consumer’s perspective.
• Seller and consumer prices may differ; for example, due to taxes, subsidies, and distribution costs.
• The wholesale price index (WPI) ideally measures average prices in the wholesale market; that is, where goods are sold in bulk.
• These price indices are used to measure the average change over time in selling prices received by producers (producer price index inflation), or prices paid by consumers (CPI inflation), or the average price change in the wholesale market (WPI inflation).

What is Wholesale Price Index?

• Wholesale Price Index, or WPI, measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses.
  • Wholesale market is only for goods, one cannot buy services on a wholesale basis.
• It is used to track the supply and demand dynamics in industry, manufacturing and construction.
• The index is released by the Economic Advisor in the Ministry of Commerce and Industry every month.
• The quantum of rise in the WPI month-after-month is used to measure the level of wholesale inflation in the economy.

How is WPI calculated?

• The index is based on the wholesale prices of number of relevant commodities available.
• The commodities are chosen based on their significance in the region.
  • These represent different strata of the economy and are expected to provide a comprehensive WPI value.
• Number of commodities: 697 items
• Base year: 2011-12

Major Components of WPI

• ‘Primary articles’ (22.62%) is a major component of WPI, further subdivided into Food Articles and Non-Food Articles:
  • Food Articles: Cereals, Paddy, Wheat, Pulses, Vegetables, Fruits, Milk, Eggs, Meat & Fish, etc.
  • Non-Food Articles: Oil Seeds, Minerals and Crude Petroleum.
• The next major basket in WPI is Fuel & Power (13.15%), which tracks price movements in Petrol, Diesel and LPG.
• The biggest basket is Manufactured Goods (64.23%). It spans across a variety of manufactured products such as Textiles, Apparels, Paper, Chemicals, Plastic, Cement, Metals, and more.
• Manufactured Goods basket also includes manufactured food products such as Sugar, Tobacco Products, Vegetable and Animal Oils, and Fats.

What are Headline and Core Inflation?

• Headline inflation refers to the change in value of all goods in the basket.
• Core inflation excludes food and fuel items from headline inflation.
• Since the prices of fuel and food items tend to fluctuate and create ‘noise’ in inflation computation, core inflation is less volatile than headline inflation.
• Headline inflation is more relevant for developing countries like India where fuel and food items account for 30-40% of the basket.

What is the Major Difference Between WPI and CPI?

• While WPI keeps track of the wholesale price of goods, the CPI (Consumer Price Index) measures the average price that households pay for a basket of different goods and services.

Why Reserve Bank of India Adopted CPI over WPI?

• On the recommendation of the Urjit Patel Committee (2014), the RBI adopted CPI as the key measure of inflation. Earlier, RBI had given more weightage to WPI as the key measure of inflation for all policy purposes.
• CPI focuses on the change in the cost of living at the consumer’s end, whereas the WPI focuses on the inflation of the economy as a whole.
• For common people, i.e. consumers, it is the CPI that is more relevant than the WPI. CPI also covers the service sector.
• Through CPI, the RBI can increase the span of monetary control and monitor inflation better.
• Therefore, the RBI linked CPI for fixing interest rates in India.

Role of Monetary Policy Committee

• Based on the recommendations of the Urjit Patel Committee, a six-member Monetary Policy Committee (MPC) was constituted for setting the policy rate i.e. Repo Rate.
• The committee was given the status of a statutory body through an amendment to the Reserve Bank of India Act, 1934.
  • With this, India joined the set of countries that adopted inflation targeting, starting from 1990 by New Zealand, as their Monetary Policy Framework.
• The Central Government notified in the Official Gazette dated August 5, 2016, that the Consumer Price Index (CPI) inflation target would be 4% (with ± 2% tolerance band) for the period from August 5, 2016 to March 31, 2021.
  • The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, medical care, etc.
  • Changes in the CPI are used to assess price changes associated with the cost of living.

Composition of the MPC

• The committee comprises of six members (including the Chairman) - three officials of the RBI and three external members nominated by the Government of India.
  • Governor of RBI acts as the Chairperson (ex-officio) of the committee.
  • Members nominated by the Government hold office for a period of four years from the date of appointment.
• None of the Central Government nominees are eligible to be re-appointed.
• The committee meets quarterly i.e. every three months.
• Decisions are taken by majority vote with each member having a vote.
• In case of a tie, the Chairman has a casting vote.

Q1) What is Deflation in simple words?

Deflation is the general decline of the price level of goods and services. Deflation is usually associated with a contraction in the supply of money and credit, but prices can also fall due to increased productivity and technological improvements.

Q2) What is Stagflation in simple words?

Stagflation is an economic cycle characterized by slow growth and a high unemployment rate accompanied by inflation. Economic policymakers find this combination particularly difficult to handle, as attempting to correct one of the factors can exacerbate another.

Source: With food inflation limited to dal roti, why govt policy may need changes | RBI