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December 22, 2022

Govt tracking inflation to avoid surge in prices : FM

by CA Shivam Jaiswal in Compliance Law

Govt tracking inflation to avoid surge in prices : FM

Inflation indicates how much more costly a set of products and services have grown over a specific time period, often a year.

The government is closely following the inflation situation to prevent any surge in prices, FM Nirmala Sitharaman told the Rajya Sabha as she attributed inflation to “extraneous” factors, such as, rising fuel and fertiliser prices.As per news and media report ,While replying to a debate in the House, the minister said while some large economies were facing recession because of their financial handling of the pandemic, the government with its “targeted approach” of providing relief had kept India on a “safe course of revival” and the country was not getting into recession.

As per news and media report “Borrow & spend and even print money to reboot the economy was the suggestion by a former FM and others during Covid. As we close 2022, we should look at thenegative effect of this suggestion by other countries, which have gone into recession,” she said

The FM also expressed confidence that fiscal deficit will not breach the target set for the current fiscal as there was revenue buoyancy to take care of additional spending of Rs 3.3 lakh crore in FY23.
The minister was replying in the Rajya Sabha to a discussion on the first batch of supplementary demands for grants for FY23. The supplementary demand for grants was later returned to the Lok Sabha, thus authorising the government to spend an additional Rs 3.3 lakh crore over and above the funds approved in the Budget.
Sitharaman said the supplementary demands for grants is essentially for meeting expenditure towards food security and fertiliser subsidy, and providing support to the economy.

The government borrows from the market to bridge the gap between expenditure and revenue. In the FY23 Budget, the government had announced to keep the fiscal deficit at 6.4% of the GDP.
Citing a report of an equity research firm, she said private sector capex announcements are up 35% year-on-year and 53% above pre-Covid levels. In an apparent reference to the Punjab government, she said media reports have recently highlighted that one state government is unable to timely pay salaries of its employees, and they are protesting.
The minister stressed that subsidies and freebies should be contextualised. “If you are able to put it in your budget, make provision for it, no one will have any objection,” said FM and added that education, health and farmer subsidies are justified. “All we want is transparency and compliance with fiscal rules,” she said as per media report

What is inflation ?

A general increase in prices and fall in the purchasing value of money . One of the most well-known words in economics, perhaps. Countries have experienced protracted periods of instability due to inflation. Central bankers often aspire to be known as “inflation hawks. Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country

Measuring inflation

Wholesale Price Index (WPI)

The WPI is produced by the Indian Ministry of Commerce and Industry. The data are collected at the first point of bulk sale in the domestic market. The prices used are ‘wholesale prices for primary articles, administered prices for fuel items and ex-factory prices for manufactured products’.That is, the WPI measures the prices of products at the factory or farm gate, prior to their sale to consumers in retail markets. One advantage of the WPI is that it has a long history, dating back to January 1942, which makes it useful for assessing long-term trends in inflation. The WPI also covers a broad range of goods, from raw materials to finished manufactures, but notably excludes services.

The WPI is calculated using the Laspeyres formula, which measures the change in the cost of purchasing the same basket of items in the current period as was purchased in a specified earlier period. This technique is simpler than other methods, since the weights are computed in the base period and, until this is updated, each subsequent calculation requires only an update of prices. A disadvantage of this type of index is that it will be biased if the composition of sales in the wholesale market is changing and the weights are not regularly updated. This is more likely to be an issue for a fast-changing, emerging economy such as India. As the Indian economy develops and household incomes increase, we would expect non-food items and services to account for a larger share of expenditure and the composition of production to evolve reflecting changes in demand. The weights for components of the WPI are derived from their share of gross output in current price terms

Consumer Price Index (CPI)

 An alternative gauge of price movements in India is provided by the CPI. As discussed below, a recent report to the RBI Governor by the Expert Committee to Revise and Strengthen the Monetary Policy Framework (the Patel Committee) recommended that the RBI adopt a flexible inflation-targeting regime with headline consumer price inflation as the target. The CPI basket is mostly kept constant over time for consistency, but is tweaked occasionally to reflect changing consumption patterns—for example, to include new hi-tech goods and to replace items no longer widely purchased. Conversely, the contents of the GDP deflator vary each year by definition because it tracks the prices of everything produced in an economy. This makes the GDP deflator more “current” than the mostly fixed CPI basket, but at the same time, the deflator includes non-consumer items (such as military spending) and is therefore not a good measure of the cost of living.

Core Inflation

A measure of core CPI inflation can be compiled by excluding the food and fuel components. However, this only leaves around 40 per cent of the consumption basket, making it a rather narrow measure of consumer price inflation. A further drawback is that, according to the RBI’s estimates, shocks to the food and fuel components have larger and longer-lasting effects on inflation expectations than shocks to the other components.9 A measure of core inflation that has a weak relationship with inflation expectations may be of limited usefulness for policymakers.

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