UPSC Prelims 2023 » Aggressive price controls needed to tame inflation

UPSC Practice recommends Aggressive price controls needed to tame inflation.

Repeated hikes in interest rates by the RBI are designed to control the money supply and dampen inflationary pressures.

It is a relief that retail inflation has moderated to 6.44% in February from January’s 6.52%. But it continues to hover above the Reserve Bank’s upper threshold limit of 6%. The worry is, despite repeated interest rate hikes, inflation has persisted above the tolerance level for 12 of the previous 14 months, and economic pundits are predicting another interest rate hike by the apex bank’s Monetary Policy Committee in April. Food prices have continued to be the spoiler. Though vegetables and edible oils eased a little, overall food items—which account for 40% of the consumer price index (CPI) basket—continued the upward momentum at 5.95%. Meat, fish, eggs, pulses, as well as electricity and fuel, became dearer. The future of food inflation also does not bode well, as analysts expect the current heat wave will likely affect crop production adversely.

Weather pundits are also predicting El Nino conditions around the monsoons, which, if they materialise, will negatively impact precipitation and, therefore, crop output. Meanwhile, it is unfortunate that state-run oil companies have not passed on the benefits of the fall in crude oil prices and gains from purchasing discounted Russian crude. Pump prices have been kept on a plateau while the oil companies continue to make windfall profits. Ironically, retail fuel prices for the consumer have in fact risen 9.9% year-on-year last month.

Repeated hikes in interest rates by the RBI are designed to control the money supply and dampen inflationary pressures. But it has been a losing battle. Even after six rounds of hikes since May last year, with the interest rate now touching 6.5%, credit controls are not working. The government needs to take more aggressive measures to tame food prices and other essentials. Though there are international factors like the Ukraine war that have disrupted supply chains, we have to search for answers at home too. Viral Acharya, former deputy governor of the RBI, significantly points out that the Big Five industrial groups—the Tatas, Reliance, Bharti Telecom, Aditya Birla Group, and Adani—have driven out the competition and risen to the level of monopolies. Their power to fix prices above competitors has become a major inflation driver. In the case of wheat, government intervention with timely supplies has helped control prices. Similar interventions to control prices will provide much-needed relief.

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Courtesy: The New Indian Express – Editorials

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