The recent fall in consumer price index (CPI) inflation and food price inflation in India has provided some relief to the Reserve Bank of India (RBI). The difficulty would be to manage inflation while striving for GDP growth of 6 to 6.5 percent in FY24. Collaboration between the RBI and the Government of India is critical to attaining these two goals.
Current Inflationary Situation
- In April 2023, CPI inflation was 4.7 percent, with food price inflation significantly lower at 3.84 percent.
- Maintaining total inflation below 5% and GDP growth above 6% for the entire year would be a commendable accomplishment.
The Importance of Food Inflation Management
- Food inflation management is critical in India due to its considerable weightage in the consumer price index (CPI) basket. Among G20 countries, the food and beverages component has the highest weightage of 45.86%.
- Food inflation has a direct impact on the general cost of living, particularly for vulnerable groups who spend a major portion of their income on food.
- Food inflation can increase household spending, reduce purchasing power, and diminish the general level of living.
- Rising food prices can produce public unrest and dissatisfaction, which can have social and political consequences.
- Food inflation management that is effective contributes to price stability, food affordability, and macroeconomic stability.
Implications of Monsoon Season
- Agricultural Production Impacts of the Monsoon Season: The monsoon is critical for agricultural development since it provides the majority of irrigation water. A normal or above-average monsoon season promotes adequate water availability, resulting in enhanced crop yields and agricultural output. A below-normal monsoon, on the other hand, might cause drought-like conditions, reducing crop yield and agricultural income.
- Food Prices: The monsoon has a considerable impact on food output, especially for rain-fed crops. Inadequate rainfall can restrict agricultural output, resulting in fewer supplies and higher food costs. Inadequate monsoon rainfall can have an influence on staple crops such as rice, wheat, pulses, and oilseeds, causing food price inflation.
- Rural Economy: Because agriculture is so important in the rural economy, the monsoon has a direct impact on rural livelihoods and income levels. A good monsoon season can raise rural incomes, agricultural employment prospects, and rural consumption. A weak monsoon, on the other hand, might result in income losses, lower agricultural wages, and decreased rural demand.
- Water Reservoirs: The monsoon adds to water reservoirs, which are necessary for hydroelectric power generation. Adequate rainfall guarantees adequate water levels in reservoirs, allowing hydroelectric facilities to generate energy. Inadequate monsoon rainfall can reduce water levels, affecting power output and potentially leading to power outages.
- Groundwater Recharge: The monsoon is important for refilling groundwater levels. Aquifers, which are key sources of water for irrigation, drinking water, and industrial use, are recharged by adequate rainfall. Inadequate monsoon rainfall can cause groundwater levels to drop, hurting agriculture, water availability, and overall water security.
- Economic Growth: The agricultural sector’s performance, which is influenced by the monsoon, has consequences for overall economic growth. Agriculture makes a considerable contribution to India’s GDP and jobs. A favourable monsoon season can boost rural demand, increase agricultural production, and contribute to stronger economic growth. A weak monsoon, on the other hand, might reduce agricultural output, affecting overall economic performance.
- The monsoon season also has fiscal ramifications for the government. Ample rainfall boosts agricultural production and decreases the need for government interventions such as subsidies or price supports. A weak monsoon, on the other hand, might put a burden on government resources, forcing higher investment on irrigation infrastructure, relief measures, or assistance to affected farmers.
What are the issues with milk inflation?
- Factors affecting supply: Supply-side dynamics influence milk inflation. Adverse weather conditions, such as drought or flooding, can restrict the availability of forage and water for cattle, resulting in lower milk production. Any delays in the supply chain, such as transportation problems or logistical difficulties, can potentially impair milk supply and contribute to inflationary pressures.
- Outbreaks of Disease: Disease outbreaks in cattle, such as lumpy skin disease, foot-and-mouth disease, or other health problems, might have an impact on milk output. These epidemics may reduce the number of healthy and productive cattle, resulting in a fall in milk output and, as a result, higher milk prices.
- Prices of Fodder: The cost of animal feed, such as fodder, has a substantial impact on milk production costs. Fodder price fluctuations can have an impact on the entire cost of keeping dairy animals. If feed costs rise owing to variables such as supply-demand imbalances, weather conditions, or changes in agricultural practises, milk prices may rise as well.
- Input Costs: The various input costs associated with milk production, such as labour, veterinary services, and energy prices, can have an impact on the total cost structure. Increases in input expenses, such as wages, veterinary drugs, or energy prices, can cause milk prices to rise.
- Import Dependence: Countries may rely on milk imports to meet domestic demand in specific situations. Import costs can rise as a result of changes in international prices, trade policies, or currency fluctuations, which can contribute to increased domestic milk prices.
- Market Structure and Competition: The dairy industry’s market structure and competition can have an impact on milk pricing. If a market is concentrated with a small number of dominating companies, less competition may exist, allowing suppliers to have greater price power. This may result in higher milk prices for consumers.
- Government Policies and Regulations: Milk inflation can be influenced by government policies and regulations governing milk production, procurement, and price. Subsidies, import limits, quality requirements, and pricing systems can all have an impact on the overall supply-demand dynamics and pricing in the milk market.
Way Forward
- Concentrate on buffer stocking policy: It is critical to use the buffer stocking policy more aggressively to combat cereal inflation. Excess supplies can be effectively unloaded in open market activities, which can help to manage cereal inflation.
- Preventive policy measures: It is critical to take policy initiatives in advance rather than reacting to occurrences. This includes emptying excess inventory on schedule and modifying import duties to preserve price stability.
- Monitor and manage external shocks: Because external shocks such as droughts and supply chain disruptions can cause food price inflation, it is critical to regularly monitor such circumstances and take necessary measures to limit their impact.
- To address milk inflation, efforts should be taken to address problems such as lumpy skin disease and high fodder prices, which have pressured milk output. Policies that promote the growth and sustainability of the milk business should be put in place.
- Lower import charges on fat and skimmed milk powder (SMP): Lowering import duties to roughly 10% to 15% could result in an increase in imports of fat and SMP, which could aid in price management of milk and milk products.
@the end
India can traverse the challenges of inflation control, ensure economic stability, and promote sustainable growth in vital areas by efficiently managing inflation, implementing proactive policies, and promoting collaboration between the RBI and the Government of India.
Source: https://pib.gov.in/PressReleasePage.aspx?PRID=1894925