Here's what can be done to keep inflation in check: An explainer

With India’s inflation expected to remain elevated for some time, economists have suggested further cut in excise duty on fuel, a key driver of the sharp price rise in the recent months. Further reduction in fuel duties and supply-side measures are some of the steps experts have suggested to keep inflation in check, as other tools like monetary tightening and fiscal consolidation at this stage can undermine economic recovery. Kirtika Suneja explains

Annual inflation

• November WPI climbed to its highest since 1991

• Retail inflation measured by CPI was at a 3-month high in November

• Core inflation, a measure of demand, remains high and sticky

• Government cut excise duty on petrol by Rs 5 and diesel by Rs 10

Divergence between WPI and CPI

Here's a weight comparison of the two baskets

• WPI doesn't include taxes, CPI does

• Two indices measure different baskets

• CPI includes services, WPI is only goods

What can be done to contain inflation?

1. Fuel duty cut

• Further duty cuts by at least Rs 5 per litre
• Likely to lower inflation by 15-20 bps
• Has immediate and secondary impact on electricity, transport cost
• High telecom tariff, currency depreciation eroded first cut
• 1% rise in oil (Indian baskt) could raise WPI by 8 bps

2. Food Prices

• Crackdown on supply side if hoarding happens
• Ease import limits on pulses, oil seed

3. More duty cuts

• More duty cuts for edible oil imports
• Duty on refined palm oil, refined palmoline now 13.75% vs 19.25% earlier

4. Buffer stock

• Prepare to use buffer stock if inflation spills over to cereals
• 1% rise in WPI primary food prices can go up CPI by 48 bps

5. Other measures

• Press for faster growth: 10% higher industrial output can ease retail inflation by 40 bps
• Address supply bottlenecks
• Boost income generating capacity to reduce burden on low income households