Table of Contents
Introduction
The article published in the editorial section of The Hindu Newspaper talks about inflation in food prices, core inflation and how the Reserve Bank Of India is managing it.
Background Information
Core Inflation
Core inflation is like the “steady” part of inflation. It measures how much prices are going up for most things we buy, except for food and fuel. Food and fuel prices can jump up and down a lot because of things like bad weather, natural disasters, or global conflicts. So, core inflation gives us a clearer picture of how prices are rising for everything else, without being affected by these sudden changes.
For example, if the price of vegetables goes up because of a bad harvest, or if oil prices spike due to a global issue, these changes are excluded from core inflation. Core inflation focuses on the long-term trend in prices, making it more stable.
Relationship Between Interest Rates and Inflation in Simple Terms
Interest rates and inflation are connected because interest rates affect how much money people spend or save. Here’s how it works:
- Raising Interest Rates:
- When a central bank (like the RBI) raises interest rates, it becomes more expensive to borrow money. People and businesses are less likely to take loans to buy things or invest. This means there’s less money being spent in the economy.
- When fewer people are spending, businesses might lower their prices or keep them from rising because they want to attract more customers. This helps slow down inflation, which means prices don’t go up as quickly.
- Lowering Interest Rates:
- When the central bank lowers interest rates, borrowing money becomes cheaper. People and businesses are more likely to take loans to buy homes, cars, or invest in new projects. This leads to more money being spent in the economy.
- When there’s more spending, businesses might raise prices because demand for their products is higher. This can lead to higher inflation, meaning prices rise faster.
How It All Works Together
The central bank uses interest rates like a dial to control inflation:
- If inflation is too high (prices rising too fast), the central bank raises interest rates to reduce spending and bring inflation down.
- If inflation is too low (prices rising too slowly), the central bank lowers interest rates to increase spending and boost inflation a bit.
However, this doesn’t always work perfectly. Sometimes, businesses may raise prices even when interest rates go up because their costs (like wages or materials) are rising. This makes inflation harder to control. Also, rising food prices can affect inflation overall, even if they’re not part of core inflation because when food prices rise, wages often go up too.
Article Explanation
The Indian government’s Economic Survey suggests that the Reserve Bank of India (RBI) should focus on core inflation, which excludes food prices. This is because food prices can be volatile and can be affected by factors like bad weather or supply disruptions. The current system includes food prices in the inflation targeting process, which adjusts interest rates to prevent too-fast price rises. However, the Economic Survey argues that food prices are important in India, as they account for about 50% of the country’s expenses.
Food prices in India are not temporary, as they have been rising steadily for years without decreasing in over a decade. The article argues that leaving food prices out of the inflation target would be a mistake for India, as they are a significant concern for many people and have not been temporary spikes. Ignoring this would not address a real problem that affects a large portion of the population.
The article discusses the Reserve Bank of India’s (RBI) approach to controlling inflation by focusing only on core inflation, which excludes food and fuel prices. It suggests that this approach may not be effective in India, as core inflation has only been near the RBI’s target of 4% in the past 13 years. Raising interest rates has not been successful in controlling core inflation in India due to higher costs for businesses and the link between food prices and core inflation.
Food price inflation affects the entire economy, as changes in food prices lead to changes in wages and other goods costs. The article also highlights the global influence on policy, with India following economic practices adopted by Western countries since the 1990s. One such practice is having the central bank control inflation, but this may not be suitable for India, where food prices play a significant role in inflation.
The real solution to controlling inflation in India lies in increasing the food supply. The government should focus on improving agricultural production to stabilize food prices and better control inflation. Relying on income transfers to offset rising food prices would strain the government’s budget, so targeting core inflation without addressing food prices leaves India vulnerable to continued inflation. In summary, boosting agricultural productivity is the real solution to controlling food prices in India.
In conclusion, the article argues that leaving food prices out of the inflation target would be a mistake for India, as they are a significant concern for many people and have not been decreasing in over a decade.
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The Editorial Page of The Hindu is an essential reading for all the students aspiring for UPSC, SSC, PCS, Judiciary etc or any other competitive government exams.
This may also be useful for exams like CUET UG and CUET PG, GATE, GMAT, GRE AND CAT
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