Editorial. Food for thought – The Hindu BusinessLine
A debate has been generated at the highest levels of policymaking over whether food should be a part of the consumer price index. The Chief Economic Adviser in the Finance Ministry wrote in the Economic Survey for 2024: “Food constitutes a very high portion of the consumer price index in developing countries…Short-run monetary policy tools are meant to counteract price pressures arising out of excess aggregate demand growth. Deploying them 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.”
In response, the RBI Governor said last week: “With the high share of food in the consumption basket (46 percent) food inflation pressures cannot be ignored…we cannot and should not become complacent merely because core inflation has fallen considerably.” He went on to talk about inflationary expectations and suggested that in an environment of persistent high food inflation, the MPC cannot afford to do so. The issue, it would seem, therefore becomes one of the weight attached to food in the consumption basket. Should it remain as high as 46 per cent, should it be less or perhaps more? This is something that needs to be investigated by experts.
But even if the exertions of experts yield a more accurate weight for food or they conclude that 46 per cent is fine, the issue raised by the CEA remains relevant. Would inflation targeting lead to superior outcomes without food? Once again, we don’t know. But a series of simulations done from past data might result in a better understanding. The technical means for it exist and could be deployed fruitfully. A more granular understanding of agricultural markets is also critical because there are several of them — both for products and in terms of location — and to lump them all together in a single number has led to a faulty understanding of the impact of agricultural produce on the price level. If the weight issue is worth re-examining, so is the consumption pattern. For purposes of inflation it is necessary to understand how much of the problem relates to terms of trade between agriculture and outside of it. There is then the rural-urban aspect. The demand for non-vegetarian proteins from affluent urban consumers has led to a diversion of foodgrains to livestock. There are now two sources of demand from urban India: people and animals. The impact of this needs to be studied.
The RBI Governor is right to worry about excluding food entirely from the monetary targeting framework because cheaper credit can, and has, led to people borrowing to speculate in the foodgrains markets. In effect, the Governor is saying that since banks can’t fully monitor end-use, it’s probably appropriate to follow tight money policies. The short point, when there are strong arguments on both sides, is to work out a way of meeting each other halfway on the principle that the best should not be made the enemy of the good. One way out might be to have two measures of inflation: one with fuel because it has a single benchmark price but without food which doesn’t (ie, a new way of measuring core inflation) and one with both as now.
