Economic Survey suggests removing food from inflation targeting

Mumbai: India’s inflation targeting framework should consider excluding food inflation, the 2023-24 economic survey said on Monday, suggesting that the difficulties faced by the poor because of high food prices can be eased through direct benefit transfers or coupons. 

As part of its inflation-targeting mechanism, the government had in March 2021 retained RBI’s flexible inflation target in the 2-6% band for the five years through March 2026. Under the framework that was first introduced in 2016, RBI targets headline inflation as measured by the consumer price index (CPI). 

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

Food inflation has remained a concern for the RBI and governor Shaktikanta Das said on 7 June that the monetary policy committee “remains vigilant to any upside risks to inflation, particularly from food inflation, which could possibly derail the path of disinflation.” 

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Das said that CPI headline inflation softened further during March-April, though persistent food inflation pressures offset the gains of disinflation in core and deflation in the fuel groups. 

The concern is borne out by data. In June, headline inflation was at 5.1%, but food inflation was at 9.4%. However, core inflation – headline inflation stripped off food and fuel — stood at 3.1% in the same period.

According to the survey, food makes up 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. 

Food is currently assigned a 46% weightage in the headline CPI basket.

“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,” the survey said.

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Experts do not see the RBI getting on board with the suggestion to exclude food inflation from the framework. 

“…The central bank is unlikely to see merit in this. Sustained rise in food inflation tends to influence inflationary expectations, which has kept policymakers cautious for (a) good part of this year and FY24,” said Radhika Rao, executive director and senior economist, DBS Bank