Central Idea

• The recent trajectory of inflation in India is attributed to the pricing power of five big corporates or ‘Big 5’ according to former Deputy Governor of Reserve Bank of India, Viral Acharya. However, the argument is flawed as the Indian inflation is different from the rest of the world, and it is driven by food price inflation. While corporate pricing power does exist, it is limited, and the extent to which it drives overall inflation is still debatable.

The factor of food price inflation

1. Divergence between Indian and Western inflation rates is not new:

• Sudden surge of Inflation in India: After the global financial crisis of 2008, Indian inflation surged higher than the economies of the US and UK due to food price inflation caused by negative agricultural shocks and high procurement price hikes.
• Core inflation: Food-price inflation tends to feed into core inflation, so it would be hasty to conclude that Indian inflation is higher than the West today due to corporate pricing power.
• Food price inflation: Evidence suggests that in India, food price inflation affects core inflation, and food price inflation enters costs of the non-agricultural sector.

1. Corporate pricing power in India:

• Corporate pricing power and overall inflation: Corporate pricing power exists in Indian industry, but the extent to which it drives overall inflation in India is debatable. The question is how much corporate power is driving inflation beyond its obvious role in elevating the price level.
• Prices of food: To measure inflation without considering the price of food is to exclude what matters most to the public, as opposed to central bankers.
• Inflation control strategy: India’s inflation control strategy needs to address the challenge of ensuring the production of food at affordable prices.

1. Comparing WP inflation with CP inflation

• Comparing WP inflation with CP inflation is to acquiesce in a mismatch.
• The commodity basket corresponding to CP includes items that do not enter the wholesale price index, so we would be comparing apples with oranges.

The argument is based on a short time period

• WP inflation has eased considerably in the six months preceding March 2023, but CP inflation has not. However, a mismatch between WP and CP inflations is not new.
• So, the maintenance of high price increases by firms in the retail sector even after wholesale price inflation has declined in 2022-23 may just be a compensating mechanism, i.e., the rising input cost of the retail sector is being passed on with a lag.

Facts for prelims: WP inflation VS CP inflation

Rising food prices driving current inflation

• Over 75% of the direct contribution to inflation in the first three quarters of the financial year came from sectors in which the Big 5 are unlikely to be represented in a big way.
• The contribution of food products alone was close to 50% in most time periods.
• Rising food prices are driving current inflation in India.

The current inflation control strategy

• Considerable rise in food prices: In India, food prices have only risen, and in recent years their rate of inflation has been very high. For all the reforms since 1991, the real price of food, i.e., its price relative to the general price level, has risen considerably.
• What matters most to public must be considered: In the context, to measure inflation without considering the price of food is to exclude what matters most to the public, as opposed to central bankers.
• Current strategy restricted to using the interest rate to dampen aggregate demand: India’s inflation control strategy is currently restricted to using the interest rate to dampen aggregate demand. This strategy avoids addressing the challenge of ensuring the production of affordable food.
• Question mark on RBI’s ability to control inflation: The RBI has been unable to control even the core inflation which central banks are assumed to be able to control. A recent intervention explaining core inflation in India has highlighted the RBI’s inability to control inflation.

Conclusion

• Inflation is being discussed only in terms of core inflation, which excludes the inflation in food and fuel prices because these prices tend to fluctuate and even out the changes, so it is assumed that they do not require a policy response. However, this assumption is flawed in the context of India’s economy, as food and fuel prices have a significant impact on the economy and people’s livelihoods. Therefore, limiting the discussion to core inflation ignores the role of corporate pricing power and the impact of food and fuel prices on the economy.

Mains Question

Q. What is the factor that primarily drives inflation in India? Highlight the relationship between food price inflation and overall inflation in India?

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