Why Inflation is Rising in India
SUBJECT: Economics (GS Paper III) | Mains Specific
News
After remaining relatively low for more than a decade (except during the COVID-19 period), India’s inflation has risen sharply, with Wholesale Price Index (WPI) inflation approaching 10%.
Unlike conventional demand-driven inflation, experts argue that the current inflation is largely the result of cost-push pressures and structural supply-side constraints, particularly rising fuel prices and weather-related disruptions.
Recent Inflation Trend
- WPI inflation remained near zero or negative until December.
- Inflation began rising sharply from March onwards, indicating renewed price pressures.
- The surge has been mainly driven by:
- Fuel & Power
- Manufactured Products
- Primary Articles (especially food items)
What is the Wholesale Price Index (WPI)?
The Wholesale Price Index (WPI) measures changes in the prices of goods traded at the wholesale level.
Components of WPI
- Primary Articles
- Food grains
- Fruits & vegetables
- Minerals
- Fuel & Power
- Crude oil
- Coal
- Electricity
- Manufactured Products
- Steel
- Cement
- Chemicals
- Machinery
- Consumer goods
Why is Inflation Rising?
1. Imported Inflation
India imports nearly 85% of its crude oil requirements.
Higher global crude oil prices increase:
- Transport costs
- Electricity costs
- Manufacturing costs
- Logistics expenses
This raises prices across almost every sector of the economy.
2. Cost-Push Inflation
Manufactured goods inflation is being driven mainly by rising production costs rather than rising demand.
Higher costs of:
- Fuel
- Electricity
- Raw materials
- Transportation
are passed on to consumers in the form of higher prices.
3. Food Inflation
Food inflation has increased due to:
- Weak monsoon
- El Niño conditions
- Lower agricultural output
- Supply shortages
Since agriculture remains highly dependent on rainfall, climate shocks quickly translate into higher food prices.
Michal Kalecki’s Structuralist Theory of Inflation
Polish economist Michal Kalecki explained inflation by distinguishing between primary commodities and manufactured goods.
Primary Commodities
Examples:
- Food grains
- Vegetables
- Agricultural products
Price Determination
- Determined mainly by demand and supply.
- Agricultural supply is relatively fixed in the short run.
- Poor monsoon or drought reduces supply, causing sharp price increases.
➡️ This results in Demand-Pull Inflation arising from supply constraints.
Manufactured Goods
Examples:
- Steel
- Cement
- Consumer durables
- Machinery
Price Determination
Manufacturing industries usually operate below full capacity.
When demand increases:
- Firms can increase production without significantly raising prices.
Therefore, prices mainly depend on:
- Cost of raw materials
- Fuel prices
- Energy costs
- Profit margins
➡️ Inflation here is primarily Cost-Push Inflation.
What is Happening in India?
Wage Costs
- Wage growth has remained relatively weak.
- Labour costs are not the main driver of inflation.
Major Driver
The primary cause is higher material input costs, especially:
- Crude oil
- Fuel
- Energy
- Transportation
These have increased production costs across industries.
Why Fuel Prices Matter
Fuel is a universal input for:
- Manufacturing
- Transportation
- Electricity generation
- Agriculture
- Logistics
Therefore, rising fuel prices create a ripple effect throughout the economy.
Role of Climate Change
India’s agriculture depends heavily on the Southwest Monsoon.
Poor rainfall due to:
- El Niño
- Drought
- Climate variability
reduces crop production, leading to:
- Lower supply
- Higher food prices
- Persistent food inflation
What Can Be Done?
Strengthen Agricultural Supply
- Expand irrigation infrastructure.
- Reduce dependence on monsoon rainfall.
- Improve agricultural resilience.
- Strengthen storage and supply chains.
- Promote climate-resilient farming.
Reduce Production Costs
Instead of suppressing demand, experts recommend lowering production costs by:
- Stabilising fuel prices.
- Improving logistics.
- Reducing transportation costs.
- Enhancing energy efficiency.
Counter-Cyclical Fuel Tax Policy
Experts recommend adopting a counter-cyclical indirect tax policy.
How it Works
When global crude oil prices rise:
- Reduce Excise Duty.
- Reduce Customs Duty.
This helps:
- Cushion consumers.
- Reduce industrial costs.
- Limit cost-push inflation.
- Stabilise domestic fuel prices.
India previously followed this strategy by cutting fuel taxes during periods of high global oil prices. However, the subsequent withdrawal of these tax concessions contributed to the recent increase in WPI inflation.
