ECONOMIC SURVEY:(CHAPTER 4)
INFLATION DYNAMICS
Domestic Inflation:
India’s inflation is shaped by both domestic and global factors. While global inflation has moderated, India faces unique challenges in managing its own inflation. Core inflation and food inflation are the main contributors to the overall inflation rate.
Softening Core Inflation and its Impact on Headline Inflation
India’s headline inflation, measured by the Consumer Price Index (CPI), has decreased in FY25 (April-December) compared to the previous year. This is mainly due to a reduction in core inflation, which excludes food and fuel prices.
KEY DRIVERS OF CORE INFLATION REDUCTION
- Core Services Inflation: Lower inflation in core services like housing, transport, and education.
- Fuel Price Inflation: A decrease in fuel prices has reduced household costs.
- Wholesale Price Inflation (WPI): A reduction in WPI suggests lower input prices for businesses, easing pressure on retail prices.
FOOD INFLATION: CONCENTRATED PRESSURE FROM FEW ITEMS
While core inflation has softened, food inflation remains a challenge, driven mainly by a few specific food items.
Factors Contributing to Food Inflation:
- Supply Chain Disruptions: Problems in the supply chain, worsened by extreme weather events.
- Reduced Harvests: Poor harvests of key food items have worsened inflationary pressures.
Key Contributors to Food Inflation:
- Vegetables and Pulses: These categories have been the primary drivers of food inflation in FY25.
UNEVEN MONSOON & SUPPLY DISRUPTIONS
The monsoon season plays a critical role in food production, especially for vegetables. Uneven rainfall across different regions has led to significant price pressures.
Monsoon-Induced Disruptions:
- Inconsistent rainfall has caused supply shortages, particularly in vegetables like tomatoes, onions, and potatoes (TOP).
- Exclusion of TOP: Excluding these vegetables from the CPI basket helps lower the overall food inflation rate.
EXTREME WEATHER EVENTS & THEIR IMPACT ON VEGETABLE PRICES
Extreme weather events, including unseasonal rainfall and heatwaves, have a significant effect on vegetable production and prices.
Vegetable Production and Supply Chain Disruptions:
- Uneven Rainfall and Heatwaves: These weather patterns disrupt vegetable production, causing shortages and price increases.
- Storage and Transportation Challenges: Extreme weather also affects the ability to store and transport vegetables, further raising prices and contributing to market volatility.
Correlation Between Weather Events and Inflation:
- Studies show a positive correlation between the increase in extreme weather events and higher vegetable prices.
- Long-Term Effects: The effects of such events can last up to three months, keeping vegetable prices high for a longer period.
GOVERNMENT MEASURES
Government Measures to Address Food Inflation
The Indian government has implemented several measures to manage food inflation, focusing on essential commodities like tur dal, onions, and tomatoes.
- Stock Limits and Monitoring: Imposing stock limits and active monitoring to prevent hoarding and ensure transparency.
- Imports to Meet Demand: Importing 1.7 lakh tonnes of tur dal in FY24 to bridge the domestic supply gap and ease inflationary pressures.
- Buffer Stocks and Price Stabilisation: Procuring buffer stocks of onions (4.7 lakh MT) and imposing a 20% export duty on onions since September 2024 to mitigate price spikes.
- Subsidised Sales: Implementing subsidised sales of essential vegetables (onions at ₹35/kg, tomatoes at ₹65/kg) to ease the burden on consumers.
INFLATION OUTLOOK & PROJECTIONS
The outlook for inflation in India suggests a gradual return to the inflation target set by the RBI and IMF.
- RBI and IMF Projections: Inflation is expected to soften further, reaching 2% in FY26.
- Commodity Prices Outlook: Commodity prices are projected to decline by 5.1% in 2025 and 1.7% in 2026, contributing to a more stable domestic inflation.
AGRICULTURAL PRODUCTION & INFLATIONARY PRESSURES
The 2024-25 agricultural production outlook suggests a potential softening of food inflation pressures due to favorable climatic conditions and improved crop production.
- Impact of the Monsoon: A normal southwest monsoon has improved water levels in reservoirs, ensuring adequate irrigation for rabi crops.
- Growth in Kharif Food Grains: Increased production of rice (up by 5.9%) and tur dal (up by 2.5%) could contribute to easing food inflation.
- Challenges and Risks: The rise in international vegetable oil prices presents an upside risk to food inflation.
GOVT. STRATEGY FOR LONG TERM PRICE STABILITY
To ensure long-term price stability, the government needs to implement strategic measures focusing on enhancing agricultural resilience and improving production systems for essential food items.
- Focus on Pulses and Oilseeds: Developing climate-resilient crop varieties to increase yield and reduce crop damage.
- Promoting Agricultural Extension Activities: Training farmers in best practices for high-yield crops to improve productivity.
- Data-Driven Decision-Making: Strengthening data collection and analysis systems to monitor prices, stocks, and storage conditions.
- Price Monitoring: Implementing high-frequency price monitoring to identify price build-up and ensure timely intervention.
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