Inflation targeting framework should consider targeting inflation, excluding food, Economic Survey notes

Even as food prices have remained elevated and have been the driver for the sustained rise in retail inflation, the Economic Survey 2023-24 has suggested excluding food from the inflation rate targeted by the Reserve Bank of India (RBI).
 
“India’s inflation targeting framework should consider targeting inflation, excluding food,” the Survey, which was tabled by finance minister Nirmala Sitharaman in Parliament on Monday said.
 
Pointing out that higher food prices are, more often, not demand-induced but supply-induced, it said that 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,” it said, while suggesting 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 specified purchases valid for appropriate durations, it recommended.
 
Retail inflation as measured by the consumer price index has remained persistently above the 5% mark, driven largely by costlier food items including vegetables, cereals and pulses. At present, the RBI targets inflation based on CPI inflation at 4% with a bank of plus or minus 2%.
 
Chief economic advisor V Anantha Nageswaran said that food shocks are largely supply shocks and monetary policy is not a tool to manage such supply shocks. “It is unfair to burden the central bank with controlling inflation when it contains a component that is not under its control,” he said.
 
The Survey said that on balance, the short-term inflation outlook for India is benign. It pointed out that the RBI and the IMF have projected that India's consumer price inflation will progressively
align towards the inflation target in FY26.
 
“Assuming a normal monsoon and no further external or policy shocks, the RBI expects headline inflation to be 4.5% in FY25 and 4.1% in FY26. IMF has projected an inflation rate of 4.6% in 2024 and 4.2% in 2025 for India,” it highlighted.
 
However, from the angle of long-term price stability, it has suggested various options. To stabilise domestic prices of edible oils, it has called for efforts to increase the production of major oilseeds such as sunflower and rapeseed and mustard, and explore the potential of non-conventional oils such as rice bran oil and corn oil. 

“The possibility of expanding the scope of the National Mission on Edible Oils beyond palm oil to other major oilseeds is worth an examination,” it has further said.
 
Similarly, it has called for measures to promote the production of pulses and improve facilities for storage and processing of vegetables. It has also called for proactive monitoring of prices by measures such as expediting the construction of the producer price index and revising the consumer price index with fresh weights and item baskets.