Excluding Food Inflation from Inflation Targeting Framework Suggested in Economic Survey
The Economic Survey for 2023-24, tabled in Lok Sabha, highlighted that while India’s headline inflation rate is largely under control, specific food items have seen elevated inflation. The Survey proposed that the Reserve Bank of India’s (RBI) inflation targeting framework should exclude food inflation. Currently, the RBI targets a headline retail inflation rate of 4% with a tolerance band of ±2%. The Survey argued that in developing countries like India, where food constitutes a significant portion of the consumer price index, targeting headline inflation effectively means targeting food prices. This can prevent farmers from benefiting from favorable trade terms when food prices rise.
The Survey suggested that India should consider targeting inflation excluding food prices, as food price increases are typically supply-induced rather than demand-induced. To mitigate the hardships caused by higher food prices for poor and low-income consumers, it recommended direct benefit transfers or coupons for specific purchases.
The Union Government’s measures to manage inflation included open market sales, retailing at specified outlets, timely imports, reduced LPG cylinder prices, and cuts in petrol and diesel prices. The RBI raised policy rates by a cumulative 250 basis points between May 2022 and February 2023, while maintaining adequate liquidity to support growth.
Globally, inflationary pressures have moderated with declining commodity prices and easing supply chain pressures, though core inflation remains sticky, driven by high service inflation. Central banks, including the Federal Reserve, have indicated that interest rate hikes may have peaked. If services inflation moderates, it could lead to policy rate reductions by central banks, benefiting emerging economies like India.
The Survey noted that despite global supply chain disruptions and adverse weather conditions, domestic inflationary pressures in India moderated in FY24, with retail inflation declining to 5.4% from 6.7% in FY23. India’s inflation rate was within its target range of 2-6% in 2023, and the RBI and IMF project alignment towards the inflation target by FY26, assuming normal monsoons and no further external shocks.
For long-term food stability, the Survey recommended increasing production of major oilseeds, exploring non-conventional oils, developing modern storage facilities for vegetables like tomatoes and onions, and revising the Consumer Price Index with updated weights and item baskets. It also called for improved price monitoring systems, linking high-frequency price monitoring data, and expediting the construction of a producer price index for goods and services to better understand cost-push inflation episodes.
(With inputs from agency)
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