India must take a relook at its current inflation targeting framework and explore one that would target an inflation rate excluding the volatile food component, Economic Survey for 2023-24 suggested on Monday.

The Survey’s suggestion comes at a time when India’s retail inflation, as measured by consumer price index (CPI), rose to four-month high of 5.08 per cent in June compared with 4.75 per cent in the previous month. This spike was largely fuelled by surge in food inflation at 9.4 per cent on the back of sharp rise in prices of vegetables.

Under the inflation targeting framework currently adopted in India, the Reserve Bank of India (RBI) targets CPI-based inflation.

The central bank is mandated to keep retail inflation at 4 per cent with a tolerance band of 2 percentage points on either side. Food accounts for nearly 50 percentage weightage in the CPI, leaving the central bank often in a fix as food inflation continues to remain volatile. Food inflation has remained above 8 per cent on a sustained basis in the recent months. 

Noting that higher food prices are, more often, not demand-induced but supply-induced, the Survey pointed out that short-run monetary policy tools are meant to counteract price pressures arising out of excess aggregate demand growth.

“Deploying them (short-run monetary tools) to deal with inflation caused by supply constraints may be counterproductive. Therefore, it is worth exploring whether India’s inflation targeting framework should target the inflation rate excluding food,” the Survey noted.

The Survey said that hardships caused by higher food prices for poor and low-income consumers can be handled through direct benefit transfers or coupons for specified purchases valid for appropriate durations, it added.

The Economic Survey noted that food constitutes a very high portion of the CPI in developing countries. That is par for the course, it added. Hence, 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,” the Survey added.

Commenting on the Survey suggestion on re-think on Inflation targeting framework sans food items, Radhika Rao, Executive Director and Senior Economist, DBS Bank, said that the RBI is unlikely to see merit in any inflation targeting framework excluding food. Sustained rise in food inflation tends to influence inflationary expectations, which has kept policymakers cautious for a good part of this year and 2023-24, she added.

CPI base year change

Meanwhile, the Statistics Ministry has begun working towards the updation of base year of CPI to 2024 from 2012, the Survey has indicated.

“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,” the Survey said.

Further, considering that the results of the household consumer expenditure survey, 2022-23 of the Ministry of Statistics and Programme Implementation are available, it may be appropriate to expeditiously revise the CPI with fresh weights and item baskets, it added.