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Explained: Why inflation is so high in India and where it is headed

Let us begin with a difficult question lurking in everyone’s mind: What is it that could worsen an already turbid scene where the economy is tanking, jobs are getting lost, incomes are falling, and new investments aren't happening? There could be many answers, but one of them is the spike in prices -- of food, of essential services, and of household items. And that is what is happening in India right now. 

Consumer inflation--defined as the growth in the consumer price index over the previous year--was close to seven per cent in July. Food inflation, in fact, was higher at 9.6 per cent, refusing to ebb in the lockdown that began after the onset of Covid-19. 

But a deeper look sheds light on the nature of this high inflation phase. Prices are rising across the board, be it food, or essential or non-essential goods and services (see chart). 

Food, especially protein rich items, have been showing high inflation in recent months. In cities, electricity, transport, and even mobile communication are getting costlier. At the same time, core inflation is being pushed up due to rising prices of recreational activities and personal care products. 

But let's look at food inflation first. 

Consumer food inflation has consistently remained high since September 2019, initially due to a favourable base effect, and later due to supply disruptions that had begun even before Covid-19 made its way to India. It was 14.2 per cent in December 2019. 

But then there was a lockdown in March, April and for some period in May--centralised as well as localised--which added to supply disruptions. 

This explains the high inflation in protein rich food items to a great extent, said former agriculture secretary of India, Siraj Hussain. 

“If you look at meat and fish, the market is profoundly informal. There was a restriction on movement of chicken, meat, fish, and eggs, and to some extent, milk as well. Their licenses were not renewed. At the retail level, meat shops were not allowed to open, and so on,” he said. 

But when it comes to basic foodstuffs such as cereals and pulses, he said that the reasons are different. 

“Pulses saw record production and imports in FY17 and FY18, after which both declined. The current high inflation in pulses could be due to the depletion of existing stock of pulses,” said Hussain. 

Cereals such as rice and wheat, on the other hand, are the staples in India, and there has been consitent bumper production the past several years. Here, government procurement comes to play. Rice and wheat stocks with the government were at record high levels in June 2020. Including unmilled paddy, the stocks are well over 900 million tonnes. 

“The government is committed to providing free food to the vulnerable in its post-Covid policy response, and has made record high procurements this year. This has cut down the supply of rice and wheat in the open market, reducing their availability and pushing up their prices,” Hussain told Business Standard. 

Inflation in fruits is mellow, but vegetable inflation has spiked to 14 per cent in villages, and is at a relatively moderate level of 6.7 per cent in cities and towns. This could be due to their perishable nature. 

When we come to non-food items, the rural-urban divide is stark. Take fuel inflation, for instance. 

Inflation in fuel and light in villages is -0.3 per cent, while that in cities is close to nine per cent. Major items in this category are LPG, electricity and firewood, in addition to diesel used on farms, which carried a small weight in the basket. 

This difference could be attributed to higher electricity usage in urban homes due to lockdown in offices and public areas, said Devendra Pant, chief economist at India Ratings. 

In most states, electricity consumed in higher slabs is costlier than that in the first slab. For example, Maharashtra charges Rs 3.46 per unit for the first 100 units, while the charge jumps to Rs 7.43 per unit for the next 200 units. 

Inflation in transport and communication is high both in the rural as well as the urban. Rising taxes on petrol and diesel, and increased prepaid tariffs of telecom operators have resulted in this, Pant said.

Health and education--other important essential non-food consumption items--are showing moderate inflation, below 6 per cent, though health inflation in cities has edged up. It is uncertain how much of this could be attributed to Covid-19, though. 

As for recreational expenses and those on personal care, they have gone up in cities due to higher consumption of internet and television, as people largely stayed at home till July. 

Gold prices skyrocketed in July, which got reflected in higher inflation for personal care items. 

But this high inflation phase will soon go away, said D K Joshi, chief economist at Crisil. 

“Food prices will come down after a good harvest this year. Core inflation should also moderate as economic conditions improve and supply disruptions ease a bit,” he said.

But he also said that retail prices will remain elevated vis-a-vis wholesale prices as the supply disruptions are stronger at the retail distribution level than that between production and wholesale value chain.  

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