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LATEST NEWS UPDATES | Why risks to inflation in India are on the rise -Roshan Kishore

Why risks to inflation in India are on the rise -Roshan Kishore

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published Published on Jul 3, 2017   modified Modified on Jul 3, 2017
-Livemint.com

There is a growing risk that inflation may spike in the coming months

The sharp drop in prices of farm products over the past few months has not just upset farmers across the country, but also seems to have complicated the task of India’s monetary authorities. The minutes of the last meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) show that the committee is divided on the issue of inflation outlook, in general, and food inflation, in particular.

While inflation data has been consistently below RBI’s forecasts over the past few months, there is a growing risk that this trend may not continue in the coming months. Three factors, in particular, pose a risk to inflation in India: low price expectations of farmers which can affect cropping decisions, the frenzy around cow protection which can wreak havoc on India’s cattle economy, and the introduction of the new goods and services tax (GST), which if not managed well, can contribute to inflation.

To put the current drop in inflation in the right perspective, it may be useful to compare it with historical trends, using the old wholesale price index (WPI) series which provides a consistent time-series from the 1980s.

The data clearly shows that food inflation has been the key driver of inflation in the past inflationary spirals. An analysis of the four major food groups—food grains, fruits and vegetables, milk, and animal products other than milk (including meat, eggs, and fish)—which together constitute 97% of the food component in the WPI series shows that sustained rise in the prices of milk and other animal products was the major driver of food inflation since the turn of the 21st century. Food grains had a much bigger role to play in the high inflation phase of the 1990s. Inflation in food grain prices has been relatively stable over the past two decades.

This suggests that if left unchecked, the current frenzy around cow protection can wreak havoc on the market for animal products, and take a heavy inflationary toll on the economy. Inability to sell their unproductive cattle will adversely affect dairy farmers, who have begun complaining about the restrictions on cattle sales. This would lead to an increase in milk prices. Reduction in supply of bovine meat can also push up prices of other meat products.

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Livemint.com, 3 July, 2017, http://www.livemint.com/Politics/BReXUZnD4TJhS5r2SkTMrJ/Why-risks-to-inflation-in-India-are-on-the-rise.html


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