The headline inflation rate is largely under control, although the “inflation rate of some specific food items is elevated”, the Economic Survey for 2023-24 tabled in Lok Sabha on Monday stated. Noting that the anticipated monetary policy easing by the Reserve Bank of India (RBI) has been delayed, the Survey has made a case for changing the inflation targeting framework of the central bank by excluding food inflation.
At present, the RBI’s medium-term for headline retail inflation is 4 per cent with a band of plus or minus 2 per cent. The Survey said food constitutes a very high portion of the consumer price index in developing countries and when central banks in developing countries target headline inflation, they effectively target food prices. “So, when food prices rise, inflation targets come under threat. Therefore, the central bank appeals to the government to bring down the increase in the prices of food products. That prevents farmers from benefiting from the rise in terms of trade in their favour,” it said.
India’s inflation targeting framework should consider targeting inflation, excluding food, as 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, adding that 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 specific purchases valid for appropriate durations, it added.
The Survey said the Union Government undertook “prompt measures such as open market sales, retailing in specified outlets, timely imports, reduced the prices of Liquified Petroleum Gas (LPG) cylinders and implemented a cut in petrol and diesel prices” to manage inflation. The RBI raised policy rates by a cumulative 250 bps between May 2022 and February 2023 and also managed liquidity levels efficiently. Even as higher policy rates are transmitted through the system, the RBI continues to support growth with adequate liquidity, thereby ensuring that inflation is headed to the target of 4 per cent on a durable basis, it said.
Globally, inflationary pressures have moderated in most economies with declining global commodity prices and easing of supply chain pressures, the Survey said. However, core inflation remains sticky and driven by high service inflation. There are elevated risks for core services inflation in advanced economies, it said.
Many central banks have hinted at the peaking of the interest rate hike cycle, it said. But if services inflation moderates faster, it will create space for reduction in policy rates by advanced economies and also help emerging economies like India to follow the rate cut path, it said.
“If the services inflation across economies moderates faster, that may allow central banks to bring forward the monetary policy easing cycle earlier than currently anticipated. A likely reduction in policy rates by central banks of Advanced Economies, especially the Fed, will open the space for central banks of EMEs (emerging market economies) to follow the lead, bringing down the cost of capital,” it said.
However, any escalation of geopolitical conflicts in 2024 may lead to supply dislocations, higher commodity prices, reviving inflationary pressures and stalling monetary policy easing with potential repercussions for capital flows. This can also influence RBI’s monetary policy stance, the Survey noted.
Despite global supply chain disruptions and adverse weather conditions, domestic inflationary pressures moderated in FY24, the Survey said. After averaging 6.7 per cent in FY23, retail inflation declined to 5.4 per cent in FY24.
In 2023, India’s inflation rate was within its target range of 2 to 6 per cent. Compared to advanced economies like the USA, Germany, and France, India had one of the lowest deviations from its inflation target in the triennial average inflation from 2021-2023, the Survey said.
The RBI and the IMF have projected that India’s consumer price inflation will progressively align towards the inflation target in FY26, the Survey said. Assuming a normal monsoon and no further external or policy shocks, the RBI expects headline inflation to be 4.5 per cent in FY25 and 4.1 per cent in FY26.
The short-term inflation outlook for India is benign, it said. The Survey, however, pointed out measures for some food items for long-term food stability. First, it said it is important to make focused efforts to increase the production of major oilseeds such as sunflower and rapeseed & mustard, and explore the potential of non-conventional oils such as rice bran oil and corn oil as domestic consumption of edible oils has been increasing faster than production, leading to increased import dependence.
Second, in view of the continuing seasonal surges in the prices of vegetables like tomato and onion, it is important to assess the progress in developing modern storage facilities conducive to such specific crops, and evaluate the viability of such facilities whose services have highly seasonal demand, it said.
Third, it called for revision in price monitoring systems along with suggesting expeditious revision of the Consumer Price Index (CPI) with fresh weights and item baskets after the recently released data of Household Consumer Expenditure Survey, 2022-23 by Ministry of Statistics and Progamme Implementation (MoSPI).
“FY24 witnessed swift and effective administrative action by the government to deal with price flare-ups in specific items. This was based on daily monitoring of prices at more than 500 centres. Prospectively, an important factor that can improve the swiftness and effectiveness of such action is complete clarity on prices and their indices,” it said.
For this, it specified that the high-frequency price monitoring data for essential food items collected by different departments may be linked in such a way that the build-up of prices at each stage from the farm gate to the final consumer is quantifiable and monitorable. Also, the ongoing efforts to construct the producer price index for goods and services may be expedited to have a greater grasp of episodes of cost-push inflation, it said.