If you have been following the news, you’d see all channels flashing tomato prices that have touched more than Rs. 200 in many states. It’s not just the tomatoes, most vegetables and general commodities have seen a rise in prices.
Recently released government data points that for the month of June 2023, retail inflation, measured by CPI, touched a 3-month high of 4.81%. For context, the rates stood at 4.25% and 4.70% in May and April, respectively.
The burning question is – Why have inflation rates risen?
We explore the ‘why’ in this article and will also highlight how inflation can impact your lives and the measures taken by the Indian government and Reserve Bank of India (RBI) to address the situation.
Why is India’s retail inflation at a 3-month high?
The surge in India’s retail inflation can be attributed to the hardening prices of food items. The major contributors to this inflationary trend were cereals, eggs, milk, pulses, and spices. The food basket, which accounts for nearly half of the CPI, experienced an inflation rate of 4.49% in June, significantly higher than the 2.96% recorded in May.
Now, several factors have contributed to the rise in food prices. Last year’s lower output of key staples, combined with torrential rains this year, has led to supply disruptions, impacting food prices. Hailstorms in March, April, and May also caused extensive damage to tomato crops in Maharashtra, a major supplier during the monsoon months. Climate change-induced extreme weather patterns have exacerbated the problem, contributing to the pressing shortage of tomatoes and other essential food items.
ICRA head and chief economist has stated that the unprecedented rise in vegetable prices can push the CPI inflation rate to 5.3-5.5% in July. Given the current flood-like situation in many states, this might actually turn out to be the reality.
While the rise in inflation is worrisome, it may not be nearly as bad as perceived. Context is important here.
Take a look at the image below –
Table curated by italics team. Data taken from – https://rb.gy/7ikmf
So, while it’s true that inflation spiked in June 2023, on a Q-o-Q basis, it is to be noted that on a Y-o-Y basis, it has reduced considerably, much in the range of RBI’s comfort (4% + or -). In fact, when compared to Oct and May 2022, the June 2023 rates are much lower. Yes, there was a time when the inflation figure ranged only from 5%-7.5%.
So, what does this all mean for a common man?
The rise in inflation can burden the common man, especially low-income families, and can greatly disrupt the food budget of middle-class families. It may spike poverty numbers and also impact other daily FMCG consumption items like toiletries, shampoos, and more.
Food inflation is projected to continue until August-September, and the common man may have another burden on his shoulders until then.
Measures taken by the RBI and Indian government
The Indian government has assigned the Reserve Bank of India (RBI) the responsibility of maintaining retail inflation at 4% with a margin of 2% in either direction. The RBI primarily takes into account the Consumer Price Index (CPI) while making its bi-monthly monetary policy decisions. In the most recent policy review, the RBI opted not to hike rates and maintained the status quo at 6.5%. This is the first time since May 2022 that RBI has not hiked rates.
RBI has also predicted that retail inflation for the current fiscal year would average around 5.1%. Again, supply-demand, interest rates and government policies can disrupt this prediction.
To combat the rising food inflation, the government has implemented several measures. It has imposed limits on how much food traders can withhold to stabilise prices. Furthermore, the government has instructed state-run food trading agencies like NAFED to purchase tomatoes from markets in Andhra Pradesh and Maharashtra with the purpose of redistributing them to areas where prices are significantly higher. The government’s actions intend to convey to the market its ample reserves and the willingness to step in when required to regulate prices.
Conclusion
The surge in food inflation has strained the budgets of the common man, especially those belonging to vulnerable sections of society. The RBI and the Indian government are closely monitoring the situation and taking necessary measures to ensure that inflation remains within the desired target range. However, with the persistence of food inflation until August-September, challenges may persist, requiring continued vigilance and intervention to mitigate its impact on the average citizen.