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The other compounding situation

The other compounding situation

In the furore raised with the passage of the Citizenship Amendment Bill, 2019, many of the other matters of national importance which are to have rather immediate consequence lie i the back drop compounding to worrisome extent. Matters of economy, inflation, and food beg for attention. As food inflation in November flared up to 10.01 per cent against 7.89 per cent in October on the back of soaring onion prices, consumer inflation of 5.54 per cent went past the Reserve Bank of India's projection for inflation at 5.1-4.7 per cent for the second half of the fiscal. An RBI projection holds that food inflation in October was at a 39-month high of 6.9 per cent. Facts are grave as data point to food items including vegetable for which inflation rose to 36 per cent in November against 26 per cent in October. Inflation in pulses and products stood at 13.94 per cent in November against 11.72 per cent in October. Inflation based on the consumer price index (CPI) was at a 40-month high of 5.54 per cent in November against 4.62 per cent in October, the previous high in consumer inflation being 6.07 per cent in July 2016. Experts agree that the estimates of CPI inflation for November and the index of industrial production (IIP) for October "confirm the worst fears and the economy may be headed towards a stagflationary situation". This is a situation where industrial output contracted 3.8 per cent in October. Stagflation refers to a condition of slow economic growth and relatively high unemployment, accompanied by rising prices. Contributing elements to the economic situation include the fact that core inflation (excluding food and fuel) remains low at 3.5 per cent and that much of the food inflation is because of the prices of onion—which is speculated to somewhat cool—and the increase in telecom prices and lower output in agriculture owing to unseasonal rains which are likely to continue to pose upward pressure. As per one view, while CPI food inflation rose to an uncomfortably high 10 per cent, a moderation in vegetable prices should considerably ease food inflation in early 2020. But with reference to the decline in area sown under rabi pulses and oilseeds, there remains a concern as the high inflation also records pulses crops. The trend of inflation is expected to remain elevated as the average inflation in 2020 at 4-4.5 per cent range, as experts believe, would be much higher than in 2019.

It is noteworthy that food inflation stands in double digits after six years at 10.01 per cent. The striking aspect of this is the speed with which inflation in this domain has risen—from a mere 2.99 per cent in August to 5.11 per cent in September, 7.89 per cent in October to 10.01 per cent in November. The other intrguing aspect of the situation is that despite the fact that in a country like India where agriculture is still largely rain-fed, which means that Monsoon is the primary decisive factor for the agricultural output, the increase in food inflation in the present context is not because of monsoon failure or drought as normally might be the case, but crop damage from excess and non-seasonal rains. Taking attention to climate change and its direct impact on the economy, it is only too obvious that policy-making ought to be inclusive of the necessary dynamic factors and incorporate holistically the novel methods to address the challenges that directly impact the matters of immediate consequences. It is also noteworthy that the NDA government's tenure has been significantly marked by benign food prices. Annual consumer food inflation during its first term from June 2014 to May 2019 averaged 3.26 per cent, below the corresponding 4.31 per cent general retail inflation during the period. There was an extended 36-month period between September 2016 and August 2019 when retail food inflation was consistently below overall consumer price index inflation, averaging a mere 1.38 per cent. As expected widely, if the rise in food prices happens to be transient, then there is a minimal risk of it getting generalised. The RBI did not reduce key policy rates in its review this month despite the fact that it retained its accommodative stance. Budget is awaited to bring greater clarity to consider if interest rates could be cut to boost growth. Certainly, the surge in food inflation is a matter to cause dilemma for the government as well as RBI. The 10.01 per cent number comes on the same day the National Statistical Office released data showing industrial production falling 3.84 per cent year-on-year in October, making it a third consecutive month of negative growth. Food prices play a decisive role in inflationary expectations of Indian households. The RBI's own November survey showed these to have increased by 1.20 percentage points over a three-month ahead horizon, and by 1.80 percentage points over a one-year ahead horizon, as households "adapted to the spike in food prices in recent months". Although there isn't much the Central bank could do to control the prices of onion or pulses which are influenced more by the supply-side factors, it is a tight situation for it as it cannot just "look through" food inflation. The need of the hour is to pay soem heed to the economic situation and nurse it back to stability instead of engaging in the divisive politics of Constitutional Amendment Bill.

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