A new explanation has been proposed for the recent trajectory of inflation in India, with implications for its containment. Viral Acharya, former deputy governor of the Reserve Bank of India, has observed (on an Indian news and opinion website on March 30) that, unlike the West where it ended with COVID-19, core inflation remains high. India. This he attributes to the pricing power of the five large corporates (the ‘Big 5’). The story has received wide coverage in the financial press. For readers who are not familiar with the jargon of central bankers, ‘core’ inflation is commodity inflation minus food and fuel price inflation.
food price inflation factor
We present five comments on the claim that corporate pricing power is currently driving inflation in India. First, the divergence between inflation rates in India and the rest of the world is not new. After the global financial crisis of 2008, Indian inflation increased, reaching higher levels than the economies of its epicentres, namely the United States and the United Kingdom. This was due to an increase in food price inflation in India, driven by negative agricultural shocks and higher procurement price growth. Since food-price inflation feeds core inflation, it is too early to conclude that Indian inflation today is higher than in the West because of corporate pricing power.
Note that wholesale price (WP)-based food-price inflation for the month of February was 2.8%, while that for manufactured products, the largest commodity group in the index, was less than 2% (Ministry of Commerce, March 14). With food price inflation running rampant in India, there is no reason to claim that core inflation should have declined even as it has in the West. There is evidence that food price inflation affects core inflation in India. This is not at all surprising, as food price inflation feeds into non-agricultural sector costs.
Second, the argument that corporate power drives high core inflation is based on somewhat short time period observations. It is true that while wholesale price inflation has eased significantly in the six months before March 2023, consumer price (CP) inflation has not (Office for National Statistics, March 13). But the mismatch between WP and CP inflation is nothing new. In 2021-22, WP inflation was expected to increase by 12 percentage points, but CP inflation actually declined (RBI, 2022). Therefore, maintaining higher price increases by firms in the retail sector even after the decline in wholesale price inflation in 2022-23 could be a compensatory mechanism, i.e. the rising input costs of the retail sector are being passed on with a lag.
Third, attributing increased core inflation in consumer prices to the pricing power of the Big 5, given the decline in wholesale prices given that these groups have a higher presence in the retail trade. On balance, one would expect them to have a greater presence in the manufacturing and infrastructure sectors than in the retail sector. It may be noted that their presence in the economy may not be that much. Mr. Acharya has been quoted as saying that they account for 12% of non-financial sector sales. To us, this does not indicate high pricing power.
Fourth, to compare WP inflation with CP inflation, whether headline or core, is to admit the mismatch. The basket of goods corresponding to the CP includes items such as housing, health, education, entertainment and personal care, which are not naturally included in the wholesale price index. So, we will be comparing apples to oranges here.
Finally, we come to a point that directly casts doubt on the claim that corporate pricing power is driving the current inflation in India. At present we have data only for the first three quarters of the financial year which has just ended. However, in all of them, more than 75% of the direct contribution to inflation is by sectors that the Big 5 are unlikely to be largely represented, with food products alone contributing close to 50% in most time periods. Obviously, it is the rising cost of food that is driving the current inflation in India.
have pricing power
None of this suggests that corporate pricing power does not exist or that it is not relevant to inflation. Our own published work has shown that Indian industry has pricing power and profit rates are higher in India than globally. The question, however, remains to what extent corporate power is currently driving overall inflation in India, beyond its obvious role in raising the price level. In theory, corporates can drive inflation if concentration continues to increase and if they dominate the economy, in this case retail business. That we are not there yet in India is implied by the fact that the sectors where the Big 5 are most represented account for less than 25% of the consumer price index. But industrial intensity is most likely to increase in India, and its consequences matter for more than just prices.
While public policy in India has a history of being wary of concentration in industry, concentration in services, as in telecommunications, and in infrastructure, as in ports, is relatively new and is only coming with its implications. Used to be. As a democracy, India must guard against the potential use of counterbalancing power regardless of its consequences for any private interest, whether economic or social, and inflation. At the same time, it may be noted that India’s corporate sector is diverse and Mr. Acharya’s list includes at least one house that is regarded by the public as having business acumen, ethical practices and social responsibility.
Finally, we find the context of core inflation to limit the framing of the dialogue on inflation when the role of corporate pricing power was brought up. Core inflation leaves out inflation in food and fuel prices on the basis that these prices are volatile, tend to smooth out changes, and thus do not require a policy response. But this is a flawed assumption in the context of India’s economy.
Current Inflation Control Strategy
In India, food prices have only increased, and their inflation rate has been very high in recent years. For all the ‘reforms’ since 1991, the real price of food, ie its price relative to the general price level, has increased significantly. In context, opposition to central bankers to measure inflation without considering the price of food matters most to the public. India’s inflation control strategy is currently limited to using the interest rate to reduce aggregate demand. This – conveniently for its champions – prevents policy makers from addressing the challenge of ensuring food production at affordable prices. But, recent interventions to explain core inflation in India may ultimately have beneficial consequences. This has again emphasized that the RBI has been unable to control even the inflation that central banks are supposed to be capable of.
Pulapre Balakrishnan is at Ashoka University, Sonepat, Haryana. M. Parameswaran is at the Center for Development Studies, Thiruvananthapuram