How rising global commodity prices hurt the economy

With the Wholesale Price Index (WPI) hitting a new high of 12.94% and retail inflation based on the Consumer Price Index (CPI) hitting a high of 6.3% in six months in May 2021, the Reserve Bank of India (RBI) rated the rise in commodity prices as high systemic risk. Mint explains:

Why are rising commodity prices worrying?

As the economy heads for recovery from the devastating second wave of covid-19 cases, its sensitivity to external shocks and fears of a third wave are matters of concern. In such a scenario, the rise in international commodity prices was characterized as a high systemic risk by the RBI in its financial stability report of July 2021. The prices of steel, crude oil, iron ore, copper, aluminum, etc., have increased nationally and internationally. markets. The central bank wants to be cautious and monitor whether the impact of the rise in the WPI is extended to the CPI and act accordingly.

How can imported inflation impact India?

Soaring world commodity prices for crude oil and base metals are sure to intensify inflation in countries importing these commodities. This could be due to the increase in the cost of imported commodities as well as the depreciation of the national currency leading to higher import prices. Crude oil, petroleum products, coal coke and briquettes etc. constitute a large part of India’s imports (around 21.6%, 5.8%, 4.7%, respectively). India imports 82.8% of its crude oil needs, high oil prices have a negative impact on inflation. In addition, the unblocking of the economy has led to an increase in the demand for raw materials such as steel, iron ore, etc.

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Threat of inflation

Does the depreciation of the rupee matter?

The depreciation of the external value of the rupee worsens the situation as the landed cost of imported products increases more than the actual price increase in international markets. The depreciation of the rupee can take place only due to external factors such as net outflows of foreign institutional investments or a tense global business environment.

What is alarming about the current trend?

These crucial raw materials have widespread effects on production costs. In terms of WPI, their combined contribution is 22.97%. In addition, steel and aluminum are directly associated with a construction that is just beginning to experience a revival. Rising costs could deter home buyers and other construction activities, dealing a blow to the job-creating sector. Moreover, while India is reeling from high fuel prices, the deadlock of OPEC + countries on increasing oil production is making the situation worse.

Should India increase its political support?

Basically, commodity prices rise because countries are on the path to economic recovery, resulting in increased demand; world trade is improving; and abundant liquidity is now available in global financial markets. This has resulted in rising inflation levels around the world. However, the rise is considered transitory: it is expected to revert to its long-term average of less than 5% in emerging economies.

Jagadish Shettigar and Pooja Misra are faculty members of BIMTECH.

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