INFLATIONARY IMPACT

 Inflation refers to a sustained increase in the general price level where the value of money falls. Prices of commodities and services increase. Inflation generally occurs  due to either an increase in costs of  production like wages,raw materials and other inputs termed as cost push, or a  rise in demand for goods and services termed as demand pull inflation or by both. During inflationary  situation both low income and fixed income groups suffer most.People whose wages or salaries are linked to cost of living index do not suffer much. It may be noted here that in a  country where an estimated 140 crores of people live only 8.3 crores of people are in salaried occupations and hence inflation impacts majority of our population. 

Wholesale price index (inflation) (WPI) measures and tracks the changes in the prices of commodities in the stages before the retail level, whereas Consumer Price index (CPI) is measured at the retail segment. India's WPI recorded almost 13% in January 2022 compared to the same month last year. WPI has been recording continously double digit growth for the last 10 months. On the other hand CPI which includes services as well has only breached in January 2022  the Reserve Bank of India's prescribed tolerance range of 2% to 6% of CPI. Retail inflation which was 5.36% in December 2021 breached the tolerance level and reached 6.12% in January 2022.Inflation in urban area remained unchanged from 5.9% to 5.91% in January.  Food prices spiked from 4.05% in December to 5.43%  in January. Food inflation was very high due to higher edible oil prices. January spike was also due to increase in clothing and footwear prices which accelerated from 8.3% in December to 8.81% in January 22. Important challenge thrown by January data were non food segments like fuel & light, clothing,household goods, health, transport, communication and recreation. 

Apart from domestic factors global supply chains, global inflation and energy prices etc are likely to determine India's inflation rate. Domestically prices of petroleum products which remained static is bound to increase once the state' elections are over.More over Russian War with Ukraine have shot up petroleum prices which breached $100 per barrel is projected by one agency to reach as high as $150 per barrel seems to be  exaggerated. Russia Ukraine War may hit commodities beyond just oil and natural gas minerals, metals but  essential commodities like wheat also. India currently imports 85% of her oil requirements from abroad and  any sanctions on Russia, the third largest oil producer may have an indirect impact on India. Oil prices were identified as one of the major challenges for India's inflation.A 10% rise in crude oil prices leads to typically a 0.3-0.4%rise in head line inflation. Although immediate supplies are not affected in India prices will surge unless and until adequate excise duty cuts are implemented by the Government which may adversely affect the revenue.If excise duty on petroleum products is cut and auto fuel rates are not hiked Government will have to incur losses of estimated ₹8000 crore per month.In addition Federal Reserves of US is embarking on a major monetary policy tightening which will be followed by other major central banks and  in turn impact global financial markets which will impact Reserve Bank of India's current accomodative monetary policy and financial stability. It  has been observed that " if the Indian crude averages $100 per barrel through Financial year 2022-23, the current account deficit in the balance of payment could rise to 2.3-2.6% of GDP from the estimated 1.4% in 2021-22 "A 10% rise in crude oil prices could widen current account deficit  by 0.3 % of GDP.Similarly if war persists for a longer duration it will impact both Indian economy and global economy, resulting in a fragile global growth.

Massive punitive sanctions imposed by USA and European countries against Russia already started impinging on its financial system, high tech industries and wealthy and initially there was 45% fall in the Russian stock market index. Sanctions in turn will harm the west also. Russia is Europe's principal supplier of  gas.It exports metals like nickel and palladium. Both Russia and Ukraine export wheat.Although India import less crude from Russia it is traditionally a major supplier of defence equipment to the country.The primary area of concern is the uncertainty over the completion of defence deals with Russia including delivery of  the S 400 missile system, S400 long Range Surface to Air Missile System ((LR-SAM) developed by Russia. New Delhi's Atmanirbhar Bharat policy and PLI scheme is likely to significantly reduce dependence on import of defence equipment from  Russia in future. However  Russia is India's 26 th largest trading partner, with exports in 2020-21 valued at $2.6 billion and imports at $ 5.4 billion. Sanctions can affect exports in certain sectors like pharmaceuticals, tea and mobile phones , as against import of crude oil, petroleum products, coal,gold, metals , fertilizers and defence equipments. Russia Ukraine conflict could derial post covid recovery.In short imported inflation and associated factors are likely to breach our inflation target and derail the growth prospects.