Even as the Indian government celebrates the high growth rates that the increases in official GDP figures signal, it is haunted by the spectre of inflation. The increase in the consumer price index (CPI) for all commodities, relative to the corresponding month of the previous year, stood at 4.3 per cent in May 2023, 4.9 per cent in June, and a disconcerting 7.4 per cent in July, the most recent figure available.
For a party in power that is hoping to win another brutal majority in an election that is less than a year away, this is by no means good news. And for India’s central bank, which has tied its hands by claiming that it is targeting an inflation rate in the 2-6 per cent range, that does pose a dilemma. If it remains true to its declaration, it must raise interest rates. But if as a result GDP growth slows, the central bank will have to accept the blame for sabotaging India’s advance.
As elsewhere in the world, inflation in India emerged as a problem in late 2021 and early 2022 when COVID-related restrictions on economic activity were being relaxed. The year-on-year increment of the CPI rose from 4.3 per cent in September 2021 to 7.8 per cent in April 2022, intensified in part by the speculation-fuelled spike in global prices of fuel and food following the Ukraine invasion.
The government responded with a globally unpopular decision to ban wheat exports in May 2022, arguing that it needed to insulate India from the distorting effects of global price movements. India was the world’s second largest producer of wheat and had been a significant exporter of wheat during the immediately preceding years. But its withdrawal from markets was not the cause of global inflation.
Global prices were rising largely on account of the speculative activity of large agribusiness firms. That did seem to have a spillover effect in India as well. Wheat prices at the consumer level (as reflected in the relevant component of the CPI), which were falling relative to the previous year in the months preceding October 2021, started to rise with the increment moving from 2.4 per cent in October 2021 to 9.5 per cent in May 2022, when the ban on exports was imposed. Since high global prices can divert domestic supplies to global markets, the government argued, it can create reduced domestic availability and import inflation into the country, making a case for restricting Indian exports.
The government’s move, however, did not have the intended effect. The month-on-month rate of wheat price inflation continued to rise and peaked at 25 per cent in February 2023, nine months after the intervention. In India, too, supply shortfalls were not responsible for the inflation. Domestic wheat production had stayed in the range of 108-110 million tonnes during crop years 2019-20 to 2021-22, and according to the government’s third estimate it is projected at 113 million tonnes in 2022-23, which is well above target. Stocks of wheat with the FCI and other government agencies stood at 31.4 million tonnes in early July 2023, as against the total buffer stock requirement of 27.6 million tonnes.
So supply shortfalls cannot explain inflation. A plausible explanation is that, as in global markets, wheat price inflation was triggered by the easy availability of credit following monetary policy adjustments during the pandemic. What is noteworthy, however, is that the government has chosen to focus on trade restrictions rather than any direct assault on speculation to bring down inflation. It also seems unwilling to rapidly deploy stocks it holds, as a means of augmenting supply. It perhaps suspects that if stocks are run down and the next harvest is indifferent, speculators could run riot. But trade restrictions have not been effective.
This reliance on ineffective instruments is reflected elsewhere as well. Speculators looking at any commodity that can serve as an “alternative asset” delivering quick gains through price appreciation tend to move on. Not surprisingly, even as the government was breathing a sigh of relief when wheat prices moderated, with the month-on-month increase in prices falling to 12 per cent by July, other agricultural commodities caught the fever. If inflation is being driven by speculative finance, other agricultural commodities can serve as targets.
Rice, the other staple, was soon chosen. Between July 2022 and July this year, the month-on-month increase in the CPI for rice rose from 4.3 per cent to 13 per cent. In this case, too, an alarmed government tried to dampen prices by shoring up domestic availability through curbs on exports. It started the process in 2022 by imposing a duty of 20 per cent on exports of non-basmati white rice exports. When that did not work, on July 17, it banned exports of these varieties of rice, and followed it up on August 25 with a 20 per cent export duty on parboiled rice, extending the restrictions on exports to all varieties of non-basmati rice.
A day later, on the grounds that a section of the trade was circumventing these restrictions by wrongly classifying consignments, it set a minimum export price for basmati rice at $1,200 a tonne. Despite these moves, there is, as yet, no sign that rice price increases have been reigned in. A likely-to-be-poor monsoon because of El Nino effects is being blamed for the failure of intervention.
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Meanwhile, price inflation has spread to other agricultural essentials. The prices of vegetables, the outputs of which are sensitive to the timing, besides volume, of rainfall, tend to be quite volatile. But there are three among them—onions, potatoes, and tomatoes—which matter more because of their relative weights in the overall index, and because inflation in their prices are politically troublesome. All of them have registered sharp price increases in recent times, which are attributed to unseasonal or erratic rainfall. But possibly here too speculation plays a role in explaining month-on-month price increases as high as 160 per cent. This has forced the government to procure supplies and sell them at moderately lower prices through official trade channels. It has also imposed a 40 per cent duty on onion exports.
But overall inflation persists. A bunch of footloose speculators, darting between commodities, are garnering quick short-run gains while a dismayed officialdom looks on. More so because, being ”business friendly”, the government appears unwilling to come down heavily on the speculators, by deploying its investigative and penal agencies that are otherwise unleashed at the drop of a hat.
C.P. Chandrasekhar taught for more than three decades at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. He is currently Senior Research Fellow at the Political Economy Research Institute, University of Massachusetts Amherst, US.