How rising global commodity prices hurt the economy

With the Wholesale Price Index (WPI) scaling to a new high of 12.94% and Consumer Price Index (CPI)-based retail inflation touching a six-month-high of 6.3% in May 2021, the Reserve Bank of India (RBI) has termed rising commodity prices as a high systemic risk. Mint explains:

Why is commodity price rise a concern?

With the economy charting a course toward recovery following the devastating second wave of covid-19 cases, its susceptibility to external shocks and the fear of a third wave is a matter of concern. In such a scenario, rising international commodity prices have been termed as high systemic risk by RBI in its Financial Stability Report of July 2021. Prices of steel, crude oil, iron ore, copper, aluminium etc., have risen in the domestic and international markets. The central bank wants to be cautious and monitor if the impact of rising WPI is being extended to CPI and act accordingly.

How can imported inflation impact India?

Spiralling global commodity prices of crude oil and base metals are bound to intensify inflation in countries importing such commodities. This could be due to increased imported commodities cost as well as depreciation of home currency resulting in higher import prices. Crude, petroleum products, coal coke and briquettes etc., form a large part of Indian imports (about. 21.6%, 5.8%, 4.7%, respectively). With India importing 82.8% of its crude oil requirements, high oil prices adversely impact inflation. Moreover, unlocking of the economy has resulted in increased demand for commodities such as steel, iron ore, etc.

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Inflation threat

Does depreciation of the rupee matter?

Depreciation in the external value of the rupee worsens the situation as the landed cost of imported commodities rises more than the actual increase in prices in the international markets. Depreciation of the rupee may take place purely on account of external factors such as net outflow of foreign institutional investment or a tense global business environment.

What I s alarming  about the present trend?

These crucial raw materials have widespread effects on cost of production. In terms of WPI, their combined contribution is 22.97%. Moreover, steel and aluminium are directly associated with construction which has just started showing revival. Rising costs could deter homebuyers and other construction activities, dealing a blow to the employment genera-ting sector. Also, with India reeling under the shock of high fuel prices, the impasse among Opec+ countries over increasing oil production worsens the situation.

Should India ramp up policy support?

Basically commodity prices are rising because countries are on the economic recovery path resulting in increasing demand; global trade is improving; and ample liquidity is now available in the global financial markets. This has resulted in inflation levels increasing worldwide. However, the increase is being seen as transitory: the expectation is that it will revert to its long-term average of below 5% in emerging economies.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.

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