Invoking Sri Lanka is fearmongering: Inflation in India is a short-term phenomenon

In the last two-three months, most people have been talking about inflation. The government’s cost-push inflation (CPI) data for the month of April 2022 also shows that the inflation rate has been 7.9 per cent, which is causing unrest amongst the general public. The general public is more concerned because of the exponential increase in prices of vegetables, fruits, grains, edible oil and petrol. Let us look into the phenomenon.

There are mainly three types of inflation:

Demand-Pull Inflation is caused by heavy demand and short supply. This type of inflation is caused by increased consumer confidence, growth of the economy, circulation or velocity of money, easy credit availability from the banking sector, heavy government spending and tax cuts, and high consumer expectations, which generate demand in the market. In a nutshell, the oversupply of money in the market generates demand in the market and supply becomes short, resulting in inflation in the market.

Cost-Push Inflation is the situation in which input costs like raw materials and other inputs like wages increase the cost of production and the ultimate sale price becomes costlier. Such a type of inflation is caused by a rise in the exchange rate, which results in costlier imports. The main causes of cost-push inflation are high public debt, which results in currency printing and devaluation, high input costs, increased taxation, and monopoly or duopoly in a few sectors.

Built-In Inflation is the situation wherein inflation is increased gradually by the efflux of time. Like every year, an increase in wages raises the cost of the product, while on the other hand, the worker creates demand as a result of the wage increase. Such a type of inflation is considered essential for the growth of the economy.

Recent cases of inflation are not only adversely affecting India but also worsening the condition of other countries worldwide. We are witnessing the rout of Sri Lanka due to hyperinflation. A few people — call them pro-Left economists or anti-establishment, whatever moniker suits you —are fearmongering the populace through their statements, articles, or tweets that India has also entered the era of hyperinflation. These are the people who are looking at the one side of the coin only. A chart containing the previous eight years' average inflation and the last two months' average inflation of major economies is as under. This chart has been prepared from the World Bank/IMF data and whenever data for the current month was not available, the expected rate has been taken into consideration.

From the above chart, it is clear that inflation has become a universal tenet in the last two months. Countries such as the EU, the United Kingdom, the United States, France, and others that had low inflation in the previous decade are now experiencing hyperinflation. India bids well if we compare inflation data with other countries. For the calculation of inflation, basically three major components are taken into consideration, being primary articles, including food and grocery, power and fuel, and manufactured products, consisting of items like base metal, chemicals & chemical products, machinery, textiles, etc, are part of this group.

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The current inflation is a mixture of demand-pull, cost-push, and inbuilt inflation. The Indian government’s COVID-19 stimulus packages resulted in the highest ever money circulation in India, which is currently more than Rs 31 lakh crore. Similarly, India is primarily an importer, and inflation in other major supplier countries as a result of uncertainties in the Russia-Ukraine conflict is negatively affecting the cost of inputs such as fuel, metals, chemicals, and so on, as well as increasing inflation. The value of rupees against the dollar is also contributing to cost-push inflation. Since India is still developing, it is heavily expending on subsidies, the paupers and the destitute, whose usual inbuilt inflation is also making the inflation saga spicier.

The Reserve Bank of India recently increased the base rate and CRR, sucking around Rs 1 lakh crore of currency from the market, and it is hoped that more such decisions of increasing the base rate by 1 per cent and increasing the CRR and SLR can be taken in the upcoming Monetary Policy Committee (MPC), which is scheduled in the first week of June.

Apart from the monetary policy, which is targeting demand-pull inflation, cost-push inflation can be tackled by joint efforts of the public and government. The government is procuring crude oil from Russia in rubble to check the increased price of fuel all over the world at the cost of diplomatic relations with developed countries. The government should also take more steps to transact with other countries in currencies other than the dollar because our rupees have become stronger compared to other major currencies except for the dollar. This fact can be vouched from a comparative list of the exchange rates of various currencies:

The general public should also tend to purchase indigenous products so that their current account balance is kept at a tolerable limit and our currency gets stronger. They should also eschew the demand for subsidies or free stuff so that money can be spent on capital goods for employment generation. This inflation will persist in the short term, as long as the Russia-Ukraine conflict continues and the supply situation remains normal.

Mukesh Kabra is a Surat-based Chartered Accountant practising for 25 years. Yuvraj Pokharna is an independent journalist and columnist. Views expressed are personal.

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