Divergence in WPI and CPI posing new challenges – UPSC GS3

  • Inflation in many big countries.
  • In India, WPI is in double digits while CPI is low.
Inflation across world:
Inflation across the world is due to the rebound from the pandemic induced slowdown.
  • U.S: Some experts think that the current inflationary pressure is a short-term episode triggered by supply-chain disruptions. While others see it as the result of the large spending under US President Joe Biden’s American Rescue Plan. As a result of sustained inflation, Americans expect their financial situation to worsen in the near term, a level of pessimism not seen since the Great Recession of 2008-09.
  • Turkey: Turkey has an alarming annual inflation rate of 19.9%. Making matters worse, its president Recep Tayyip Erdogan believes the right response is to reduce interest ratesHowever, reducing interest rates will not be a good policy choice for now.
  • Brazil: Brazil has recently joined the list of countries with double-digit price growth. Inept policymaking by the government has created fears that the economy is on the verge of a technical recession.
Inflation in India:
  • India, especially, faces a tricky inflation problem. Retail inflation is elevated but not at the level seen in many other economies.
  • But wholesale price inflation, that increased sharply to 12.5% year-on-year in October, has reached its highest levels since the late 1990s. This poses an unusual policy challenge.
  • The wide divergence between wholesale and retail inflation is impacting the small manufacturers, the self-employed and workers.
  • Those who buy from the wholesale market and sell on the retail market are seeing a fall in their profits. They are cutting back production and this, in turn, is adversely affecting workers.
Dilemma in managing WPI and CPI divergence:
  • If this divergence is allowed to persist, growth will likely decline as small businesses, already under strain, reduce output and cut employment and possibly shut down.
  • But if the government tries to narrow the gap by letting retail inflation rise, consumers will be hit hard.
What is the way out for India?
  • The only reasonable way out is for policymakers to tackle wholesale price inflation directly.
  • This will require a combination of fiscal and monetary measures, like reducing the high tax on fuel and slashing all non-essential spending while also supporting those hit hardest by the pandemic.
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