The Reserve Bank of India (RBI) has revealed that the country’s disinflation process is anticipated to be slow and lengthy, with the 4% inflation target expected to be met only in the medium term. The following sections unravel different aspects of inflation and disinflation in the Indian economy.
Understanding Disinflation
Disinflation represents a reduction in the rate of inflation, indicating a slower speed of price increase compared to previous periods. Notably, disinflation differs from deflation, which denotes a consistent drop in the overall price level. An optimal level of disinflation is beneficial as it hinders the economy from overheating.
Factors Leading to Disinflation
The key causes of disinflation can range from a slowdown in economic growth or demand, implemention of tight monetary policy or higher interest rates, fiscal consolidation leading to reduced government expenditure, to a stronger exchange rate.
Unpacking Inflation and Deflation
Inflation signifies the rising prices of everyday goods and services such as edibles, clothing, housing, transportation and consumer staples. It gauges the average change in the price of a basket of goods and services over a specific duration. Conversely, the rare decrease in the price index of this items’ basket is termed ‘deflation’. Inflation reflects the decline in the purchasing power of a country’s currency unit, measured in percentages.
Evaluation of Inflation in India
India primarily utilizes WPI (Wholesale Price Index) and CPI (Consumer Price Index) to measure inflation, accounting for wholesale and retail-level price changes, respectively. The Monetary Policy Committee (MPC), led by the RBI governor, leverages CPI data for controlling inflation. The MPC aims to diminish inflation to 4% in the medium term, while maintaining it between 2% and 6% in the long run.
RBI’s Recent Updates on Inflation
As of May 2023, India’s annual retail inflation was reported at 4.25%, a reduction from April 2023’s 4.7%. However, analysts anticipate persistent inflation in upcoming months, making it challenging to achieve the 4% target. The RBI has projected inflation for FY23-24 at 5.1%, which is less than previous estimates but surpasses the set target, thus highlighting the need for continuous monitoring and policy measures to tackle inflationary pressures and maintain macroeconomic stability.
UPSC Civil Services Examination Relevant Questions
The article further includes two questions from previous UPSC Civil Services Examinations that relate to concepts of inflation and disinflation. The first question pertains to factors contributing to demand-pull inflation, while the second assesses the understanding of CPI and WPI’s role in evaluating inflation in the Indian economy.
