Inflation is an economical concept that refers to the rise in prices of goods and services used daily, such as food, clothing, housing, recreation, transport, and consumer staples. The increased price indicates the decrease in the purchasing power of a country’s currency, which may lead to a slowdown in economic growth. However, a moderate level of inflation promotes production.
In India, the National Statistical Office (NSO), under the Ministry of Statistics and Programme Implementation, measures inflation. It primarily uses two indices — the Wholesale Price Index (WPI) and the Consumer Price Index (CPI) — to gauge the changes in wholesale and retail-level prices respectively.
Consumer Price Index Explained
The CPI measures price changes from a retail buyer’s perspective. It calculates the difference in the price of commodities and services, such as food, medical care, education, electronics, etc., purchased by Indian consumers. There are four types of CPI: CPI for Industrial Workers (IW), CPI for Agricultural Labourer (AL), CPI for Rural Labourer (RL), and CPI (Rural/Urban/Combined). The Labour Bureau in the Ministry of Labour and Employment compile the first three, while the NSO compiles the fourth. The Monetary Policy Committee (MPC) uses CPI data to control inflation.
The Concept of Headline and Core Inflation
In India, food and fuel inflation form one of the components of headline inflation. Headline Inflation accounts for the total inflation for the period, comprising a varied basket of commodities. However, Core Inflation excludes volatile goods like food and fuel from the said basket.
Causes of Recent Inflation in India
Recent inflation in India has been driven mainly by a broad-based rise across the food segment, lower Kharif output due to erratic monsoon, and adverse base effects alongside an increase in food and fuel prices. Other reasons include global inflation pressures, inflationary expectations, and weakness in the Indian currency.
Index of Industrial Production (IIP) Overview
The IIP measures the changes in the volume of production of industrial goods within a given period. It is published monthly by the NSO. The IIP measures the growth rate of broad sectors such as mining, manufacturing, and electricity, and use-based sectors like basic goods, capital goods, and intermediate goods. The government agencies, including the Ministry of Finance and the Reserve Bank of India, utilize IIP for policy-making.
About Eight Core Sectors
The eight core sector industries, comprising 40.27% of the weight of items included in the IIP, are refinery products, electricity, steel, coal, crude oil, natural gas, cement, and fertilizers.
Reasons for Recent IIP Contraction
Recent contraction in the IIP can be attributed to a 3.3% contraction in mining sector output, a 2.0% contraction in non-durables, and a shift in discretionary consumption to contact-intensive services, among others. Supply disruptions and a weakening global growth outlook also affect industrial output.
Addressing the Current Situation
To mitigate the impact of inflation and IIP contraction, there should be consistency in import policy and more accurate crop forecasts. Additionally, the decade-old CPI base year of 2011-12, which gives nearly half of the weight to food items, needs to be revised to reflect changes in food habits and lifestyle. A strong recovery in domestic demand will support India’s industrial output. Measures such as prohibiting exports of certain food products to maintain domestic supplies and curb price rise have been taken by the Government.
Previous UPSC Civil Services Examination Question Overview
In 2015, the question in the ‘Index of Eight Core Industries’ examination was about the industry with the highest weight. The answer was electricity, as it had the highest weightage in the index of eight core industries. The Eight Core Industries comprise 40.27% of the weight of items included in the IIP. As of April 2021, the current weights of the eight core industries are petroleum refinery production (28.04%), electricity (19.85%), steel(17.92%), coal production (10.33%), crude oil (8.98%), natural gas production (6.88%), cement production (5.37%), and fertilizer production (2.63%).
