Food Inflation and Its Implications on Price Stability
Context:
India’s economic activity shows signs of softening momentum, as indicated by the latest Purchasing Managers’ Index (PMI) for the manufacturing sector and the Services Business Activity Index. However, the exclusion of MSMEs from the survey poses challenges in assessing the overall strength of job creation and inflation dynamics. In particular, the resurgence of food inflation raises concerns regarding the Reserve Bank of India’s efforts to maintain price stability while supporting economic growth.
Relevance:
GS-02 (Effect of Policies & Politics of countries on India’s interest)
GS-03 (Growth & Development, Monetary Policy)
Prelims:
- Inflation
- Purchasing Managers’ Index
- Food Inflation
- Food Price Index
- CPI
- MSP
Mains Questions:
- Analyze the implications of excluding MSMEs from the PMI survey, highlighting the risks associated with relying solely on PMI as an indicator of job creation and formal economy strength. Evaluate alternative data sources that can provide a more comprehensive assessment. (150 words)
What does the Purchasing Managers’ Index (PMI)?
- The Purchasing Managers’ Index (PMI) serves as an important gauge of business activity in both the manufacturing and services sectors. It relies on survey-based measures that inquire about respondents’ perceptions of changes in key business variables compared to the previous month.
- Its purpose is to provide valuable information to decision-makers, analysts, and investors, offering insights into both present and future business conditions.
- The PMI is widely utilized to predict shifts in economic trends, offering valuable insights that can complement or serve as an alternative to official data such as GDP.
Dimensions of the Article:
- Weakening Momentum in Manufacturing and Services Sectors
- The MSME Conundrum and Job Creation Assessment
- Unemployment Rate and Concerns over Price Stability
Weakening Momentum in Manufacturing and Services Sectors
- The latest PMI readings reveal a marginal easing in production growth at major private sector factories, accompanied by a deceleration in the expansion of output in the services sector.
- The surge in manufacturing PMI in May and the high seasonally adjusted figure for services in April likely contribute to the softer readings in June. Notably, new orders in manufacturing and the intake of new business in services have shown strength, indicating robust demand.
The MSME Conundrum and Job Creation Assessment
- The exclusion of MSMEs from the PMI survey poses challenges in evaluating the overall strength of job creation in the manufacturing sector. As MSMEs play a significant role in manufacturing employment and contribute substantially to the gross value added, relying solely on PMI as an indicator of employment trends may not provide a comprehensive picture.
- Alternative data sources need to be explored to capture the employment dynamics of the formal economy accurately.
Unemployment Rate and Concerns over Price Stability
- Despite the positive indications from S&P Global’s surveys regarding private sector employment, CMIE data reveals a spike in the unemployment rate for June.
- Policymakers need to closely monitor the trend of output prices in both the manufacturing and services sectors.
- The resurgence of food inflation poses a threat to the RBI’s efforts to anchor inflation expectations and maintain growth-supportive price stability.
Way Forward:
- Inclusion of MSMEs in surveys: It is imperative to incorporate MSMEs in future surveys to obtain a more holistic understanding of employment trends and the overall strength of the manufacturing sector.
- Diversification of data sources: Policymakers should explore alternative data sources, such as comprehensive employment surveys, to complement PMI data and ensure a more accurate assessment of job creation and formal economy dynamics.
- Addressing food inflation: Measures need to be taken to mitigate food inflation and support the RBI’s efforts in maintaining price stability, which is crucial for sustainable economic growth.
Conclusion:
While the latest PMI readings offer some reassurance regarding domestic demand for manufactured goods and services, the exclusion of MSMEs from the survey poses challenges in assessing job creation and overall economic strength. Policymakers must address the resurgence of food inflation and ensure that efforts to maintain price stability align with long-term growth objectives. A comprehensive and diversified approach to data collection and analysis is essential for informed decision-making and sustainable economic development.
