Recently the Chairman of Rajya Sabha issued a direction to extend the sitting hours and change the timing of Question Hour in the Upper House. Beginning with the Winter Session, which starts on November 24, Rajya Sabha will meet from 11 am to 6 pm, an hour more than its typical sitting hours. Question Hour will be scheduled from 12 pm to 1 pm, which was earlier held in the first hour of meeting. Members of Parliament (MPs), in addition to their legislative capacity, play an important role to keep the government accountable. One mechanism for them to hold the government responsible for its policies and actions is Question Hour in Parliament. During Question Hour, MPs raise questions to Ministers on various policy matters and decisions. Currently, all MPs can submit up to ten questions for every day that Parliament is in Session. Of these, 250 Questions are picked up by a random ballot to be answered each day that Parliament meets. While 230 Questions are answered in writing by Ministries, 20 Questions are scheduled to be answered orally by Ministers on the floor of the House. When a Question is answered orally by a Minister, MPs are also able to ask him/her two Supplementary Questions as a follow up to the response given. Therefore the proper functioning of Question Hour allows Parliament to be effective in its accountability function. Over the years Question Hour has become a major casualty to disruptions in Parliament. The last decade has seen a decline in the number of questions answered orally on the floor of the House. Rajya Sabha had tried to address this problem in 2011, when Question Hour was shifted to be held from 2 pm to 3 pm, but this was discontinued within a few days. The 2014 Budget Session saw both Houses of Parliament work for over hundred percent of their scheduled sitting time. However, while Question Hour functioned for 87% of its scheduled time in Lok Sabha, it functioned for only 40% of its scheduled time in Rajya Sabha. In 13 of the 27 sittings of the 2014 Budget Session, Question Hour in Rajya Sabha was adjourned within a few minutes due to disruptions. It was as a result of these increasing disruptions in the Upper House that the change in timing of the Question Hour and extension of its hours of sitting were proposed. While the Rules of Procedures of Rajya Sabha designate the first hour of sitting for Question Hour, they also allow the Chairman of the House to direct otherwise. It is using this Rule that the Chairman of Rajya Sabha, Mr. Hamid Ansari, issued directions for the Question Hour to be shifted to noon. It now remains to be seen whether this change in timing of Question Hour in the Upper House will be sufficient to allow for its smoother functioning. Sources: M.N. Kaul and S.L. Shakdher, Practice and Procedure of Parliament, Lok Sabha Secretariat, 6th Edition, 2009 Rajya Sabha Rules of Procedure, Rajya Sabha Secretariat, 2010
The Monetary Policy Committee (MPC) has decided to conduct an off-cycle meeting today to discuss the failure to meet the inflation target under Section 45ZN of the Reserve Bank of India Act, 1934. As per the Reserve Bank of India Act (RBI), 1934, MPC is required to meet at least four times each year, to discuss the macroeconomic issues in the country, and take policy decisions to address those. This is the second time MPC has conducted an off-cycle meeting in 2022-23. The meeting is scheduled in light of inflation being consistently high for nine consecutive months.
In this blog, we discuss what the inflation targeting framework is, examine retail and wholesale prices, and the divergence between them.
What is the inflation targeting framework, and what happens if inflation is persistently high?
In 2016, Parliament amended the RBI Act, 1934 to change the monetary policy, and introduce an inflation targeting framework. This framework prioritises price stability to achieve sustainable GDP growth. Price stability allows investors to confidently invest their money for productive activities, without worrying about it losing value. Price stability also maintains the purchasing power of consumers, i.e., the ability to purchase a good (or service) with a given amount of money.
As per the new framework, the central government, in consultation with RBI sets: (i) an inflation target, and (ii) an upper and lower tolerance level for retail inflation. The target has been set at 4%, with an upper tolerance limit of 6% and a lower tolerance limit of 2%. The upper and lower limits indicate that although it is desirable for inflation to be close to 4%, deviation between these limits is acceptable. The target and bands are revised every five years. In March 2021, the existing targets were carried forward.
Retail inflation has been above 6% for the past nine months, and it has been above 4% from October 2019 onwards (See Figure 1).
Figure 1: Consumer price index (year-on-year; in percentage)
Sources: Database on Indian Economy, Reserve Bank of India; PRS.
If inflation is above or below the prescribed limits for three quarters, RBI must submit a report to the central government explaining why prices have been rising (or falling) persistently, what will be done to correct that, and an estimate as to when the target will be achieved.
The MPC uses tools such as interest rates to control the level of inflation in the economy. One such rate is the policy repo rate, which is the rate at which RBI lends money to banks. An increase in the policy repo rate makes borrowing money more costly, and hence is expected to control inflation by reducing the money supply. MPC increased this rate from 4% in April 2022 to 4.4% in May 2022, to 4.9% in June 2022, to 5.4% in August 2022, and to 5.9% in September 2022.
Breaking down the Consumer Price Index and the Wholesale Price Index
Consumer Price Index (CPI) measures the general prices of goods and services such as food, clothing, and fuel over time. Retail inflation is calculated as the change in the CPI over a period of time. Goods and services such as petrol, food products, health, and education are considered for its calculation, which are assigned different weights (See Table 1). Between February 2022 and August 2022, the average annual inflation was 6.9%. The rise in prices of subcomponents of the CPI during this period is indicated in Table 2.
Table 1: Assigned weights for the calculation of CPI
Sources: MOSPI; PRS.
Table 2: Average inflation of some CPI components
Sources: Database on Indian Economy, RBI; PRS.
CPI is not the only index that measures inflation in an economy. The Wholesale Price Index (WPI) measures the wholesale prices of goods. A change in wholesale prices reflects wholesale inflation. Table 3 indicates the weights assigned to goods for calculating the WPI. Manufactured goods include metals, chemicals, food products, and textiles.
Primary articles (23%) include food articles, and crude petroleum and natural gas. Fuel and power (12%) include mineral oils, electricity, and coal. WPI has remained above 10% from April 2021 onwards. It reached an all-time high of 17% in May 2022. This was driven by the inflation in metals, kerosene and petroleum coke, fruits and vegetables, and palm oil.
Table 3:Assigned weights for the
Sources: Ministry of Commerce and Industry; PRS.
Why has WPI inflation been consistently above CPI inflation?
Movements in the WPI have an impact on the CPI. For almost a year and half, CPI inflation has remained below WPI inflation. However, as per the design of the indices, it is expected that CPI would remain above WPI, and that any increase in WPI would reflect in the CPI after a time lag. This is because retail prices include taxes (as a percentage of price), while wholesale prices do not. Additionally, some of the goods in WPI act as inputs in the goods considered in CPI. An increase in input prices would lead to higher retail prices after a time lag.
We discuss possible reasons for why CPI has remained below WPI for a year and a half.
Figure 2: Consumer Price Index and Wholesale Price Index
Sources: Database on Indian Economy, Reserve Bank of India; PRS.
Composition of indices
As indicated in Table 2 and 3, the composition of the two indices varies. For instance, prices of manufacture of basic metals, chemicals, and machinery grew at an average rate of 13% between February 2021 and September 2022. They contribute 7% to the WPI. These are input goods for producing final goods and services such as automobiles, which are included in the CPI. The rise in prices of transport vehicles, communication devices, fuel for transport, and housing (CPI components) rose by 6% during this period.
The Ministry of Finance has observed that wholesale prices did not feed into retail prices (from March 2021 onwards) as wholesalers absorbed the rising input costs and did not pass them on to retailers. In August 2022, it noted that as retail prices are rising now, the pass-through may occur.