You editorial “Worries over growth” seems to approve of the “core inflation” concept as a determinant of monetary policy. In this context, it is relevant to add that in the US, the concept of core inflation was developed for two reasons. First, because the volatility of food and fuel prices was unrelated to monetary factors, and, second, because they had relatively low weights (13.378 per cent and 4.525 per cent, respectively) in the price index. It helped eliminate non-monetary factors for policy making. Further, the Consumer Price Index for the US is for the urban population since fewer than five per cent of the people work in the rural/agricultural sector.
These factors, however, do not hold good for India. In fact, our core sector should include only food and fuel. In the RBI surveys on rural credit, we found that there were small and marginal farmers who sold their foodgrain crops to settle their dues with lenders and then went to the market to buy them. Landless labourers get their wages in cash and they also have to buy food. The rise in real rural incomes is not distributed equitably. Monetary factors do drive up food prices — take, for example, the dole distributed under the rural employment guarantee scheme. The RBI governor has spoken about inflation as a regressive tax that hits the poor. Nowhere is the impact felt more than in the case of food prices. He would do the economy a service if he administered a bold and healthy shock to the system and its expectations by saying that core inflation would be redefined to refer to only food and fuel prices. Of course, that does not mean that the rest of the prices will be ignored.
A Seshan Mumbai
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