VisionIAS - Video Classroom Lecture

Economics Class 02

BRIEF BACKGROUND OF THE PREVIOUS CLASS (05:45 PM)

CPI OR RETAIL INFLATION (06:00 PM)

Although the history of CPI is very old in India.
But initially, it was more confined to labour forces.
There were CPI Industrial workers, CPI agriculture labour, and CPI Rural labour which were calculated by the Labour Bureau under the Ministry of Labour and Employment.
There used to be an additional CPI calculated by MOSPI known as CPI urban non-manual labour.
It was the Rangrajan committee which advocated that instead of WPI, CPI should be given more importance in policymaking because the CPI depicts inflation in a real sense.
Following that Urjit Patel and others also provided a set of suggestions and finally in 2010, the standing committee on Finance recommended certain changes in CPI.
Currently, the following six CPI are calculated, the details are below:
1) CPI Urban-
2) CPI Rural
3) CPI-Combined
All three are calculated by MOSPI and the current base year is 2012=100.
These three CPIs consider a total of 299 items, earlier it was 460, for rural 448.
These items are divided into 6 categories of
1) Food and beverages(roughly 55 Percent)
2) Pan, tobacco and other intoxicants- it has minimum weightage (roughly 3 per cent)
3) Clothing and footwear
4) Fuel and light
5) Housing - it is not calculated in CPI Rural.
6) Miscellaneous
There is a separate Consumer Food Price Index (CFPI) also with a weightage of 47.25 Percent.
There is a headline CPI in terms of combined/rural/urban and if food and fuel are subtracted then it is called core CPI.
If nothing is mentioned then CPI means CPI combined.
The rest of the three CPIs are CPI industrial workers (2016=100)(It is used to calculate dearness allowance).
CPI Agriculture labour (base-year 1986-87), CPI rural labour (The base year is 1986-87).

Index of Industrial Production (06:40 PM)

This data is calculated by MOSPI and it reflects the overall status of Industrial production.
It is also published on a monthly basis with MoM and YoY data.
It consists of 839 items and the current base year is 2011=100.
These items are divided into three categories:
1) Manufacturing (78 percent weight)
2) Mining (14%)
3) Electricity (8%)
Along with this IIP data, the 8 core industries index is also provided by DPIIT.
8 core industries index given by DPIIT (base year, 2011-12=100),
The weightage of 8 core industries in IIP is 14.27.
These 8 core industries are petroleum products(maximum weightage), crude, natural gas, coal and electricity then cement and steel and fertilizer (minimum weightage )

PURCHASING MANAGER'S INDEX (07:10 PM)

It was introduced by Standards and Poor in the USA in the 1950s and in India, it is calculated by Standard and Poor India and some other research wings.
It is separately calculated for manufacturing and services on the basis of interviews of various managers.
Points are allotted on a scale of 0 to 100 and more than 50 indicates expansion of economic activities.
The data is presented in the first week of every month.
Additionally,
There is an OBICU survey by RBI which stands for Order Book Inventory Capacity Utilisation.
It provides the status of industrial production
Lipstick index: It was popularised around 2000 and it indicates the perception of inflation where people spend on cosmetic products but switch to comparatively cheaper brands.
It represents that recession is around.
Thalionomics: This idea was proposed by the chief economic advisor in 2021, where ready-to-eat food platters or thali prices should be considered to calculate food inflation.
Note: Recently while referring to food inflation Chief Economic Advisor advocated that the weightage of food items in CPI should be reduced.
However, the government rejected it.
In food inflation one of the factors is widespread food wastage also.
According to the food waste index of UNEP, almost 132 Kg/person/year (1 billion meals/day) is the quantum of food wastage, and it contributes to 9-10 per cent of greenhouse emissions.

IMPACT OF INFLATION (07:40 PM)

The impact of inflation must be viewed in its composite sense and not in isolation because it influences the entire ecosystem of economic activities.
1)At the individual level- It reduces the purchasing power
It reduces the saving rate and slows down capital formation
Inflation is considered to be good for the debtor and detrimental for the creditor
At market level-
It reduces the investment and therefore may adversely impact the supply chain.
Cost of production escalates reducing the margins of profits.
In terms of exports and imports, exports get costlier due to the increased cost of production and if due to inflation rupee depreciates the import will be expensive.
At the government level-
The interest rates/ coupon rate has to be revised along with certain haircuts for supply-side constraints like reducing custom duty on various things.
Note: If govt. is asking to print more fresh currencies in order to manage the fiscal deficit, which is considered to be highly inflationary.

Controlling inflation (08:00 PM)

Inflation can be controlled through monetary policy through a hawkish or dovish stance where the money supply can be decreased or increased respectively.
It can also be controlled with the help of fiscal policy
It is advocated that monetary policy is more useful for demand pull inflation while fiscal policy could be used for cost push inflation.
Inflation also can be controlled through special measures like price stabilisation funds, the Essential Commodities Act 1955, and such.
Essential Commodities Act 1955 provides provisions regarding upper limits of holding certain essential items like foodgrains, medicines, cotton, kerosene and such.

The liquidity trap (08:15 PM)

It refers to a situation where the real interest rate rates are zero or negative, and people prefer to have liquidity instead of depositing it in the banks.
As a consequence of it, the speculation increases towards infinity and due to drops in deposits, investments get reduced.
The real interest rate refers to the nominal interest rate- inflation.
For example, if the interest rate is 7 per cent and inflation is 6 per cent then the nominal interest rate will be 7 per cent and the real interest rate is 1 per cent.

TOPIC FOR THE NEXT CLASS: PUBLIC FINANCE.