Rising food prices

 The rising price of food lies at the core of India’s inflation

The Economic Survey

 

of this year makes a suggestion which has implications for inflation control. 

It is that the price of food  out of the inflation target that the Reserve Bank of India (RBI) is mandated with. 

In technical 

to targeting ‘core’ instead of ‘headline’ inflation, which is the practice now. 

here require recognition of two aspects

 These concern the 

• recent experience with inflation in India 
• the current policy for inflation control.

Food price and inflation trajectory

Two aspects 

1 very high inflation  

First, of late, food price inflation has been very high by historical standards. In June, the year-on-year increase in the price of food was close to 10%. 

Food price inflation 

has been elevated since 2019. Note that this is before the onset of the COVID-19 pandemic, not to mention the Ukraine war, implying that domestic factors are at work. With food inflation high and food accounting for a large part of the consumer price index, overall inflation has been higher than usual too.

2 controlling inflation in India given  to the RBI 

Now to the second aspect that needs to be understood. Since 2016, by an act of Parliament, controlling inflation in India has been hived-off to the RBI, which is expected to control it through variations in the interest rate, a practice termed as ‘inflation targeting’.

missed the targeted 4% every year 

The RBI has missed the targeted 4% every year in the past five years. 

SOME OTHER EXAMPLE 

In the United Kingdom

the Bank of England’s record has been patchy too. 

United States

where the Federal Reserve aims at 2% inflation, it shot up to over 8% in 2022.

Two questions arise when we consider the suggestion made in the Economic Survey

 

First, is the move to remove the price of food from the inflation target justifiable in terms of the goals of economic policy? 

Second, is the RBI likely to be any more successful in controlling core inflation than it has been in its efforts to control headline inflation?

 

The answer to both the questions is ‘no’. India is an economy in which the share of food in household expenditure is close to 50%. This is very high by international standards. For instance, in the U.S., it is less than 10%.

FAST UPS AND DOWN IN INFLATION ? 

A technical justification is given to such a proposal by asserting that food price fluctuations are ‘transitory’, that is, increases are inevitably followed by a downward movement. Well, this certainly is not true for the Indian economy.

Food price inflation has not been negative in any of the 13 years since 2011-12, the base year for the current consumer price index.

Targeting core inflation

CAN RBI HANDLING THIS 

1 whether the RBI can be expected to be any more successful if it were to confine itself to targeting core inflation / excluding the effects of volatile prices like food and energy . 

2 In the past 13 years, the annual average core inflation has been within the targeted 4% in only one year, that too barely.

WHAT RBI DO ? 

1 First, a rise in the RBI’s repo rate does not dampen core inflation as claimed. In fact, increasing it is seen to lead to a rise in the inflation rate. 

2 GOOD  logic.? 

 As the higher interest rate LOW demand, which is how it is meant to work, firms may well raise prices to guard their profits. After all, firms face a double whammy now. Working capital costs would have increased and revenues fallen as aggregate output contracts.

3 WE FOLLOW WESTERN ? 

Since 1991, all political parties in India have been eager to demonstrate that they follow closely practices adopted in the West, no matter that they may be irrelevant or, worse still, damaging, to this country. Leaving food price inflation out of the inflation target is one such practice.

Focus on agricultural production

 last five years, the RBI will not be able to control core inflation either. The current inflation in India can only be handled through supply-side measures that raise the yield in agriculture. 

comprehensive approach 

to agricultural production, one that keeps costs in check so that supply is forthcoming at a steady price as the population and economy grow.

Taking food inflation out of the inflation target without any plan for its control would leave India defenceless against an ever-present threat to the standard of living of its population.

However, if food prices keep rising faster than the overall inflation rate, as they are right now, such transfers would absorb a 

• rising share of the Budget, 
• leaving less and less for public goods. 

This is undesirable. There is no alternative to controlling the rise in the prices of all goods, which currently is the avowed policy.

Source the hindu