The Hindu Editorial Analysis
24 September 2021

1. The current official inflation rate does not correctly measure price rise

  • Source: The Hindu- Page 7/OPED:  A flawed calculation of inflation
  • GS 3: Economy

Context: Inflation for the last four months has been worryingly high — wholesale price index (WPI) has been above 10% and consumer price index (CPI) crossed the 6% mark in June, which was above the Reserve Bank of India (RBI)’s tolerance band.

RBI's Limit: The amended RBI Act,2016 provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once in every five years.

  •  
  • Accordingly, the Central Government has notified in the Official Gazette 4% of CPI, after the consultation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6% and the lower tolerance limit of 2%.
  • Further, this target has been extended for 5 more years till 2026.

 

Data issues - regarding inflation numbers

  1.  

1. Base effect: In April and May 2020, data on production and prices could not be collected due to the strict lockdown. So, the current data on prices for April to July 2021 are not comparable with the same months of 2020. 

2. Single figure cannot represent diverse market: The single number is arrived at by assigning weights to different commodities and services. For WPI, the weights in production are used; for CPI, the consumption basket is used. But people are not homogenous. The consumption basket is vastly different for the poor, the middle classes, and the rich.

3. Changed Consumption pattern: The RBI data show that consumer confidence fell drastically from 105 in January 2020 to 55.5 by January 2021. That means the consumer confidence has not recovered. It has down to 48.6 in July 2021 during the second wave. According to one report, 230 million slipped below the poverty line. All this implies that the consumption basket for different sections of the population had changed. Thus, the weights in the CPI would have changed and inflation required recalculation, but this has not been done. 

4. Under-representation of Services: In production, services are about 55% of the GDP but have no representation in WPI and about 40% in CPI. We know that health costs shot up during the pandemic, but is this has not been captured in inflation figures. Similarly, education costs soared with the requirement of mobile phones, laptops and Wi-Fi. Many services were not used. Eating out and travel, for instance, should have been factored out. 

5. Data Collection:  the shock of lockdowns not only made data collection difficult but the consumption basket for calculating CPI should have been changed.

 

Impact of high Inflation on lives:

  1.  

1. Impact on consumer: If the rate of inflation is 10%, then compared to the previous year a person has to spend 10% more to buy the same amount of things.If the person’s income rises by less than 10%, their budget gets impacted adversely. For the middle classes, both consumption of less essential items and savings get reduced.

2. Impact the poor: There always is a minimum level of consumption that one has perform in order to survive and live a dignified life. High inflation prevents one from living such a dignified life. As the poor, who hardly save, have to curtail essential consumption.

3. For savers: Low inflation means a high real interest rate that, in turn, tends to crimp investment activity.

4. Lower Demand: Due to high prices, demand has declined not only for non-essentials but even for essentials. In a vicious cycle, this is slowing down economic recovery and employment generation.

5. Impact on the government’s revenues: It tends to increase the budgetary deficit. This puts pressure on the government to cut back budgetary expenditures, especially on the social sector.

6. Lower spending on social sector: That aggravates poverty and reduces demand further. Thus, inflation in times of low demand and reduced incomes leads to a vicious cycle of slowing the economy and a growing crisis in the lives of the poor and unemployed, most of whom belong to the unorganised sector and some to the organised sector.

7. Employers: They have to compensate this through variable pay such as dearness allowance if the trend in the WPI gets extended to the CPI too.

8. Impact for lenders: The real earning decreases.

9. Volatility in economy: low inflation helps promote stability, confidence, security and therefore encourages investment. High inflation does the reverse.

10. Scope for Monetary easing and counter-cyclic measures decreased: The central bank(RBI) targets consumer inflation. If it is already high, there can be no monetary expansion further.

 

Factors underlying inflation currently

  •  
  • Increased taxation of energy to raise resources: Since energy is used for all production, prices of all goods and services tend to rise and push up the rate of inflation.
  • High indirect taxes: Including tax on fuel, it is regressive and impacts the poor disproportionately more. It also makes the RBI’s task of controlling inflation difficult.
  • Disruption to supply: The lockdowns disrupted supplies and that added to shortages and price rise. Prices of medicines and medical equipment rose dramatically. Prices of items of day-to-day consumption also rose. Fruits and vegetable prices rose since these items could not reach the urban markets.
  • Production from unorganized sector got hit: Big business raised prices since competition from the unorganised sector decreased. And in spite of a lower wage bill, they raised prices as reflected in a sharp rise in the profits of the corporate sector.
  • International factors: Most major economies have recovered and demand for inputs has increased while supplies have remained disrupted (like chips for automobiles). So, commodity and input prices have risen (like in the case of metals). Businesses claim increase in input costs underlies price rise. The weakening of the rupee also added to inflation.

Conclusion: In brief, the current official inflation rate does not correctly measure price rise since the lockdown administered a shock to the economy. The method of calculating it needed modification. Many of the non-rich have suffered a double blow due to loss of income and rise in prices. This is slowing down the pickup in growth by curtailing demand.

Expected Question: What are the factors behind the recent rise in Inflation in the Indian economy? How does it impact the citizens of the country? (250 Words)

 

  •  
  • This has implications for the future even under the low emissions scenarios
    • Source: The Hindu-  Page 7/OPED: Sea level rise is certain
    • GS 3: Environment

Context: The recently published Intergovernmental Panel on Climate Change (IPCC) Assessment Report from Working Group I — ‘Climate Change 2021: The Physical Science Basis’ — is a clarion call for climate action. It provides one of the most expansive scientific reviews on the science and impacts of climate change.

5 Scenarios: The report discusses five different shared socio-economic pathways for the future with varying levels of greenhouse gas (GHG) emissions. The scenarios illustrated are the following:

SSP

Scenario

(Likelihood)

Estimated warming

(2041–2060)

Estimated warming

(2081–2100)

Very likely range in °C

(2081–2100)

SSP1-1.9

very low GHG emissions:

CO2 emissions cut to net zero around 2050

1.6 °C

1.4 °C

1.0 – 1.8

SSP1-2.6

low GHG emissions:

CO2 emissions cut to net zero around 2075

1.7 °C

1.8 °C

1.3 – 2.4

SSP2-4.5

intermediate GHG emissions (likely):

CO2 emissions around current levels until 2050, then falling but not reaching net zero by 2100

2.0 °C

2.7 °C

2.1 – 3.5

SSP3-7.0

high GHG emissions (unlikely):

CO2 emissions double by 2100

2.1 °C

3.6 °C

2.8 – 4.6

SSP5-8.5

very high GHG emissions (highly unlikely):

CO2 emissions triple by 2075

2.4 °C

4.4 °C

3.3 – 5.7

 

Current Scenario: The average global temperature is already 1.09°C higher than pre-industrial levels and CO2 concentration in the atmosphere is currently 410 ppm compared to 285 ppm in 1850.

Impact on Coasts:

  •  
  • Population impacted: Close to 700 million people worldwide live along the coast and there continue to be plans to expand coastal cities. Therefore, understanding the risks involved from climate change and sea level rise in the 21st and 22nd centuries is crucial.
  • Momentum of Increase even after reduced emissions: Sea level rise will continue after emissions no longer increase, because oceans respond slowly to warming. The centennial-scale irreversibility of sea level rise has implications for the future even under the low emissions scenarios.
  • Reasons for sea level rise:
    • Expansion of warm ocean waters,
    • Melting of glaciers on land, and
    • The melting of ice sheets in Greenland and Antarctica.
  • Current rate of rise:
    • Global mean sea level (GMSL) rose by 0.2m between 1901 and 2018.
    • The average rate of sea level rise was 1.3 mm/year (1901-1971) and rose to 3.7 mm/year (2006-2018).
    • While sea level rise in the last century was mainly due to thermal expansion, glacier and ice sheet melt are now big contributors.
  • Impact in different scenarios:
  • In the low emissions scenario: GMSL is expected to be 0.19m in 2050 and 0.44m by 2100.
  • In the very high emissions scenario: GMSL is expected to be about 0.23m in 2050 and 0.77m in 2100. 

 

Uncertainties

  •  
  • Marine ice cliff instability (MICI): Ice sheets can destabilise rapidly as the water gets warm (marine ice sheet instability or MISI). Ice cliffs can collapse swiftly in a related process, leading to rapid sea level rise; In the very high emissions scenario, with low confidence, sea level rise can be as high as 1.61m by 2100.
  • The main uncertainty lies in ‘when’ rather than ‘if’ the high-end scenario occurs. Projections based on ‘structured expert judgments’ indicate that sea level rise as high as 2.3m by 2100 cannot be ruled out.
  • According to the UN Environment Programme Emissions Gap Report, the world is heading for a temperature rise above 3°C this century, which is double the Paris Agreement aspiration. And there is deep uncertainty in sea level projections for warming above 3°C.

 

Vulnerability in India

  •  
  • Vulnerable Communities: Communities along the coast in India are vulnerable to sea level rise and storms, which will become more intense and frequent.
  • Storm surges & Flooding: They will be accompanied by storm surges, heavy rain and flooding. Even the 0.1m to 0.2m rise expected along India in the next few decades can cause frequent coastal flooding. A speculator might think that if less than a metre sea level rise by 2100 is the likely scenario, they have another 60-80 years to continue developing infrastructure along the coast.

 

Way Forward:

  •  
  • More studies are needed to be done to access the impact.
  • Adaptation to sea level rise must include a range of measures, along with coastal regulation, which should be stricter, not laxer, as it has become with each update of the Coastal Regulation Zone.

Expected Question: What are the main reasons behind the sea level rise? How does it impacts India? (150 words)