Why inflation is rising in India

India’s WPI inflation surged to nearly 10% in June, after remaining around zero or negative until December and rising sharply from March onward.

Major Components of WPI Inflation

• WPI is a weighted average of primary articles, fuel and power, and manufactured products.
• Fuel and power, along with manufactured products, have contributed the most to the recent increase.
• Primary articles include food products, minerals and other basic commodities.

Structural Differences in Pricing

• Prices of primary commodities are largely demand- and supply-determined, as their short-term supply is relatively fixed.
• Agricultural prices rise sharply when poor rainfall or crop failure reduces supply.
• Manufactured-product prices are mainly cost-determined, based on production costs and profit margins.
• Greater demand for manufactured goods generally raises production rather than prices, unless capacity constraints exist.

Role of Fuel and Power Costs

• India depends significantly on imported crude oil, making domestic production costs vulnerable to global price movements.
• Higher fuel and power prices increase transport, electricity and raw-material costs.
• These cost increases are passed on to consumers through higher prices of manufactured goods.
• Fuel inflation and manufactured-product inflation therefore show a close relationship.

Causes of Food Inflation

• Food inflation is mainly caused by adverse supply conditions rather than excessive demand.
• Inadequate monsoons and El Niño-related drought conditions reduce agricultural production and raise food prices.
• Historical trends show that drought years are frequently accompanied by high food inflation.
• However, strong demand may also cause food inflation even in the absence of drought.

Nature of India’s Inflation

• The present inflation is largely cost-push and supply-side inflation.
• It is driven by expensive fuel, imported inputs, weak monsoons and agricultural supply constraints.
• Conventional demand-control measures alone may therefore be insufficient.

Measures to Control Food Inflation

• Expand investment in agriculture and irrigation infrastructure.
• Reduce excessive dependence on monsoon rainfall.
• Improve storage, transportation and agricultural supply chains.
• Strengthen crop-risk management and climate-resilient agriculture.

Measures to Control Manufactured-Product Inflation

• Reduce customs and excise duties on fuel when international crude-oil prices rise sharply.
• Prevent excessive transmission of global crude prices to domestic retail fuel prices.
• Strengthen renewable-energy capacity to reduce dependence on imported fossil fuels.
• Include fuel and power prices more effectively within the broader inflation-management framework.

India’s inflation surge is not primarily the result of an overheated economy; it reflects food-supply disruptions and the transmission of high fuel costs into manufactured-product prices. Therefore, supply-side reforms must complement monetary policy.