Economic Survey Volume 2 Chapter 4 (Latest)

ECONOMIC SURVEY   

VOLUME II

CHAPTER – 4

PRICES AND INFLATION

 INTRODUCTION

The chapter analyses the inflation trends through various indices, drivers of inflation and government measures taken to control inflation. It also covers trends in global commodity prices and seasonal movements in inflation index.

 

CURRENT TRENDS IN INFLATION

  • Average inflation for FY 2017-18 (Apr-Dec) stood at 3.3%, below the threshold of 4%.
  • Food inflation: Good agricultural production coupled with regular price monitoring by the Government helped to contain food inflation. Average food inflation for the financial year 2017-18(Apr-Dec) declined to a low of 1.2% and stood at 5% in Dec, 2017. The rise in food inflation in recent months is mainly due to factors driving prices of vegetables and fruits.
  • Food inflation based on WPI has also declined, it averaged 2.3 per cent in FY 2017- 18 (Apr-Dec) as compared to 6.3 per cent in FY 2016-17 (Apr- Dec).
  • Core inflation: the CPI based core inflation has remained above 4 per cent during the last four financial years. Refined core and refined core (excluding housing) are moving close to core inflation.

 

IndexFY 2016-17 (Apr-Dec)FY 2017-18 (Apr-Dec)
Core ( CPI excluding food & fuel group)4.8%4.5%
Refined core (core excluding petrol & diesel )5.0%4.4%
Refined core (excluding housing) (Refined core excluding housing )4.9%4.0%

Production Price Index

The Producer Price Index (PPI) measures the average change in the prices of goods and services, either as they leave the place of production called Output PPI or as they enter the production process called Input PPI.

 PPI contrasts with other measures such as the Consumer Price Index (CPI) which measures changes in prices from buyers or consumers perspective.

The benefits of migrating from WPI to PPI are:

  • Cover bulk transactions of all goods and services,
  • Do away with the bias of double counting inherent in WPI
  • Compile indices that are conceptually consistent with the National Accounts Statistics (NAS) for use as deflators.

 

Production Price Index

The Producer Price Index (PPI) measures the average change in the prices of goods and services, either as they leave the place of production called Output PPI or as they enter the production process called Input PPI.

PPI contrasts with other measures such as the Consumer Price Index (CPI) which measures changes in prices from buyers or consumers perspective.

The benefits of migrating from WPI to PPI are:

  • Cover bulk transactions of all goods and services,
  • Do away with the bias of double counting inherent in WPI
  • Compile indices that are conceptually consistent with the National Accounts Statistics (NAS) for use as deflators.

 

Housing Price Index

  • The Housing Price Indices (HPIs) are a broad measure of movement of residential property prices observed within a geographic boundary.
  • The first official housing price index for the country named ‘NHB RESIDEX’ was launched in July, 2007 by the National Housing Bank (NHB).
  • Currently, National Housing Bank is publishing NHB RESIDEX for 50 cities (are 18 State/UT capitals and 37 Smart Cities) on quarterly basis with FY 2012-13 as base year.
  • NHB does not compute the composite all India housing price index, however, using population proportion as weights, an all India index as weighted average of city indices was computed which showed that the rate of growth in housing prices at All India level has started to decline from the quarter ending December, 2016.
  • It has decreased to around 4% in the first quarter of FY 2017-18 from over 8% in the third quarter of FY 2016-17.

DRIVERS OF INFLATION

  • Both CPI-Combined and CPI-Rural inflation was driven mainly by food during FY 2016-17. The miscellaneous group has contributed the most to it during the current FY.
  • In urban areas, while food was the main driver of inflation during last year, housing sector has contributed the most in the current financial year.

 

Seasonal Movements in CPI-C and its Food components

  • The price fluctuations in items arising from supply shocks during certain periods of the year are characterized as seasonal in nature.
  • General (Headline) inflation is more volatile than core – due to large changes in the relative prices of certain food items vulnerable to supply shocks.
  • Within food basket of the price indices, pulses, fruits and vegetables groups, in particular, have witnessed large changes in prices mainly due to their seasonal nature.
  • Seasonality starts from July and ends in the month of November for CPI-C (All Groups). Seasonal peak is observed in the month of August for CFPI and Vegetables.
  • Non-Food groups of CPI-C display negligible seasonality.
  • Within Food price indices, variability level of vegetables is several times that of pulses.

TRENDS IN GLOBAL COMMODITY PRICES

  • As per the commodity prices published by the World Bank, energy commodity prices are surging recently (with an average inflation of 15.3% in FY 2017-18).
  • World Bank Food price index declined by 3.0 per cent in 2017-18 (Apr-Dec)
  • World Bank’s ‘Base Metals’ inflation of 23.7 per cent during FY 2017-18 (Apr-Dec).

 

EFFORTS TO CONTAIN INFLATION

Central Government has taken several measures to control inflation:

  • Advisories are being issued, as and when required, to State Governments to take strict action against hoarding & black marketing and effectively enforce the Essential Commodities Act, 1955 & the Prevention of Black-marketing and Maintenance of Supplies of Essential Commodities Act, 1980 for commodities in short supply.
  • Regular review meeting on price and availability situation is being held at the highest level.
  • Higher MSP- to incentivize production and enhance availability of food items which may help moderate prices.
  • A scheme titled Price Stabilization Fund (PSF) is being implemented to control price volatility of agricultural commodities like pulses, onions, etc.
  • Government approved enhancement in buffer stock of pulses from 1.5 lakh MT to 20 Lakh MT to enable effective market intervention for moderation of retail prices.
  • Export of edible oils was allowed only in branded consumer packs of up to 5 kg with a minimum export price of USD 900 per MT. With a view to incentivizing domestic production this restriction has been removed on oil except for palm oil, mustard oil and sunflower oil.
  • Government has imposed stock holding limits on dealers of sugar till April, 2018.Government imposed 20% duty on export of sugar for promoting availability and moderating price rise.
  • Permitted import of 5 lakh tons of raw sugar at zero duty; subsequently, import of additional 3 lakh tons was allowed at 25% duty.
  • Export of all varieties of onion will be allowed only on letter of credit subject to a minimum export price (MEP) of $ 850 per MT till 31st December, 2017.
  • States/UTs have been advised to impose stock limit on onions. States were requested to indicate their requirement of onions so that import of requisite quantity may be undertaken to improve availability and help moderate the prevailing high prices.

 

CONCLUSION

  • CPI inflation declined to 3.3% during FY 2017-18 (Apr-Dec), with broad based decline in inflation across major commodity groups except Housing and Fuel & Light.
  • Headline inflation has been below 4% for 12 straight months, from November, 2016 to October, 2017 and CPI food inflation averaged around 1% during April -December in the current financial year.