Prices and Inflation

Inflation

• The economy witnessed a gradual transition from a period of high and variable inflation to more stable prices in the last four years.
• Headline inflation measured by the Consumer Price Index (CPI) has remained under control for the fourth successive year.
• The average CPI-combined (CPI-C) inflation declined to 4.5 per cent in 2016-17 from 4.9 per cent in 2015-16 and 5.9 per cent in 2014-15.

Food Inflation

• Good agricultural production coupled with regular price monitoring by the Government helped to contain inflation, especially food inflation.
• CFPI declined to 4.2% in 2016-17 from 4.9% in 2015-16 and 6.4% in 2014-15.
• Food inflation based on WPI has also declined, it averaged 2.3% in FY 2017-18 (Apr-Dec) as compared to 6.3% in FY 2016-17 (Apr- Dec).

Core Inflation

• While significant moderation has been witnessed in the headline and food inflation, the CPI based core1 inflation has remained above 4% during the last four financial years.
• However, it has declined from 4.8% in FY 2016-17 (Apr-Dec) to 4.5 per cent in FY 2017-18 (Apr- Dec) and was 5.2 per cent in December, 2017.

Producer Price Index

• The Government had set up a Working Group under the Chairmanship of Professor B. N. Goldar on 21st August, 2014 to suggest the methodology for introducing Producer Price Index (PPI) in India.
• The Working Group submitted its report on 31.08.2017.

The major recommendations of the Working Group on Producer Price Index are as follows:

• PPI in India may be compiled based on Supply Use Table 2011-12 using Total Final Use values for higher level weights. Initially indices based on Total Final Use weights should be compiled separately for goods and services. Aggregate index based on goods and services may be compiled and released once the coverage of service sector indices is adequate and the sector-wise indices are robust and stable.
• Two separate sets of input PPIs may be compiled - one including services and the other excluding services.
• An additional set of output PPI based on Final Demand and Intermediate Demand framework may also be compiled for the benefit of the users.
• The experimental PPI will be released on monthly basis. Initially, the base year of the experimental PPI would be 2011-12.
• The Working Group recommended inclusion of 15 services in the PPI basket to begin with. The coverage of service sector may be extended to all key sectors on an urgent basis during the experimental phases of PPI.

What PPI Measures

• 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.
• Thus, the output indices measure the average change in prices that producers receive for their outputs while the input indices measure the average change in prices that producers pay for their inputs.
• PPI contrasts with other measures such as the Consumer Price Index (CPI) which measures changes in prices from buyers or consumers perspective.

Drawback of WPI

• The Wholesale Price Index (WPI) basket tracks prices of bulk transactions at first stage of all intermediate and final products.
• Inherent drawback of the aggregate basket of WPI without appropriate segregation of intermediate and final products involves multiple counting which can lead to bias in measures of inflation. Multiple counting occurs when the price for a specific commodity and the inputs used for its production are included in an aggregate index.

Benefits of Migrating from WPI to PPI

• PPIs significantly reduce the distortion arising from multiple counting by deriving weights from Supply Use Table compiled by the CSO.
• Further, the scope of PPI extends to services which are not presently covered under WPI.
• The benefits of migrating from WPI to PPI are to cover bulk transactions of all goods and services, do away with the bias of double counting inherent in WPI and to compile indices that are conceptually consistent with the National Accounts Statistics (NAS) for use as deflators.

Drivers of Inflation

• At the all India level, CPI-C inflation was driven mainly by food during FY 2016-17 (Apr- Dec).
• While food was the main driver of CPI (Rural) inflation in 2016-17 (Apr- Dec), miscellaneous category contributed the most to inflation in rural areas during April-December of the current financial year.
• The contribution of fuel and light, clothing and footwear and pan, tobacco and intoxicants categories in CPI (Rural) inflation has risen during April to December, 2017 over the same period last year.
• In urban areas, while food was the main driver of inflation during April-December last year, housing sector has contributed the most to CPI (Urban) inflation during April-December in the current financial year, followed by miscellaneous category.

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).
• Overtime, the base year has been revised to FY 2012-13 to ensure capturing the latest information and accurately reflect the current economic situation in the country.
• Currently, National Housing Bank is publishing NHB RESIDEX for 50 cities on quarterly basis with FY 2012-13 as base year. Among 50 cities covered are 18 State/UT capitals and 37 Smart Cities.

Seasonal Movements in CPI-C and its Food Components

• The price variations/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; it fluctuates more due to large changes in the relative prices of certain food items vulnerable to supply shocks.
• Food basket which has a large weight in the price indices (particularly in Consumer Price Index) in India is affected by seasonality.
• 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.

Efforts to Contain Inflation

• Central Government monitors the price situation on a regular basis as controlling inflation is a priority area.
• It has taken a number of measures to control inflation especially food inflation which, inter alia, include the following:
• 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 including at the level of Committee of Secretaries, Inter Ministerial Committee, Price Stabilization Fund Management Committee and other Departmental level review meetings.
• Higher MSP has been announced so as to incentivize production and thereby 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.
• Accordingly, a dynamic buffer stock of pulses of upto 20 lakh tonnes has been built under the Price Stabilization Fund (PSF) Scheme through both domestic procurement as well as imports. Of this, 3.26 lakh MT has been released for market intervention and buffer management.
• Pulses from the buffer are being provided to States/UTs for PDS distribution, Mid-day Meal scheme, etc. In addition, pulses from the buffer are being utilized to meet the requirement of pulses by Army and Central Para-military Forces.
• 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 stockist/dealers of sugar till April, 2018.
• Government imposed 20% duty on export of sugar for promoting availability and moderating price rise.