Exclude food prices from inflation-targeting framework, suggests Eco Survey

Hardships caused to poor and low-income consumers can be handled through DBT, it says

India’s inflation-targeting framework should exclude food, as higher food prices are supply-induced and not a result of higher demand, the Economic Survey report said while suggesting ways as to how markets can function in the interest of farmers.

Calling for a re-examination of the inflation-targeting framework, the Survey said when food prices rise, inflation targets come under threat, which prompts the central bank to appeal to the government to bring down the increase in the prices of food products. This, in turn, prevents farmers from benefiting from the rise in prices.

“Higher food prices are, more often, not demand-induced but supply-induced. Short-run monetary policy tools are meant to counteract price pressures arising out of excess aggregate demand growth,” the Survey said.

In May 2016, the RBI Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation-targeting framework.

“…it is worth exploring whether India’s inflation-targeting framework should target the inflation rate excluding food. Hardships caused by higher food prices for poor and low-income consumers can be handled through direct benefit transfers or coupons for specified purchases valid for appropriate durations,” the Survey said.

Commenting further on the issue during a media interaction, Chief Economic Advisor V Anantha Nageswaran said it is somewhat unfair to burden the Reserve Bank of India (RBI) with controlling inflation when a significant component, like food prices, is not under its control.

“Monetary policy is a short-run macro aggregate demand management tool. It is not a tool to manage aggregate supply shock and food shocks are predominantly supply shocks. Also, in a way, it is a bit unfair to burden the central bank with controlling the inflation when it contains a component that is not under its control,” said Nageswaran.

On March 31, 2021, the Centre retained the inflation target and the tolerance band for the next five-year period — April 1, 2021 to March 31, 2026. RBI’s retail inflation target is 4 per cent, with a variation of 2 per cent on either side.

Gaura Sengupta, economist at IDFC First Bank, said it is not the time to abandon the headline inflation-targeting framework.

“Not right now, because of the fact that food is a large part of the consumption expenditure basket. So, given the fact that it is highly volatile and subject to a lot of supply side shocks, it can't be really overlooked because there is always a possibility that food inflation can spread into non-food components. Therefore, for an economy like India, where the per capita expenditure on food is still substantial, money policy would need to remain focused on headline inflation,” she said.

According to the Survey, food inflation rose from 3.8 per cent in FY22 to 6.6 per cent in FY23, and further to 7.5 per cent in FY24.

In June, RBI Governor Shaktikanta Das had said that there is a need for close monitoring of food price uncertainties and their potential spillover effects on headline inflation.

Retail inflation, gauged by the consumer price index, was at 5.08 per cent in June of the current year. However, food inflation was at 9.36 per cent. The RBI projected retail inflation for the current financial year at 4.5 per cent. In the previous financial year, retail inflation stood at 5.4 per cent.