Impact of Excluding Food Prices from the Inflation Target

Source: The post Impact of Excluding Food Prices from the Inflation Target has been created, based on the article “The essence of India’s inflation problem” published in “The Hindu” on 17th August 2024

UPSC Syllabus Topic: GS Paper3- Economy- inflation

Context: The article argues against removing food prices from India’s inflation target, emphasizing that food inflation affects most households and core inflation. It advocates for agricultural production improvements to manage inflation effectively, instead of solely relying on monetary policy.

For detailed information on Inflation In India read this article here

What is the Economic Survey’s Suggestion?

1. The Economic Survey suggests removing food prices from the Reserve Bank of India’s (RBI) inflation target.
2. This would shift focus from “headline” inflation, which includes all items, to “core” inflation, which excludes food and fuel prices.
   For detailed information on Inflation read this article here

How is Inflation Currently Controlled?

1. Inflation in India is currently controlled by the Reserve Bank of India (RBI) through “inflation targeting.”
2. The RBI aims to maintain inflation at a 4% target using interest rate adjustments.
3. However, the RBI has missed this target every year for the past five years.
4. Core inflation, excluding food prices, has been above the 4% target for 12 of the last 13 years, showing limited success in current inflation control methods.

For detailed information on RBI inflation targeting read this article here

What is the Impact of Excluding Food Prices from the Inflation Target?

1. Food prices have been rising sharply in India, with a nearly 10% year-on-year increase in June.
2. Since 2019, food price inflation has been consistently high, even before the COVID-19 pandemic and the Ukraine war.
3. Food accounts for nearly 50% of household expenditure in India, compared to less than 10% in the U.S.
4. High food prices significantly impact the cost of living, especially for poorer households, making them vulnerable to price spikes.
5. Food price inflation has been positive every year since 2011-12, indicating a persistent issue.
6. Ignoring food prices in inflation targeting would overlook a crucial factor affecting most Indians, potentially worsening their living standards.

What is the Solution to Rising Food Prices?

1. Enhancing Agricultural Productivity: Focus on increasing agricultural yield to stabilize food prices. This approach addresses the root cause of inflation, rather than just managing it through monetary policy.
2. Comprehensive Supply-Side Policies: Implement policies that reduce costs and ensure a steady supply of food as the population and economy grow, rather than relying solely on the RBI’s interest rate adjustments.
3. Inclusion of Food Prices in Inflation Targeting: Continue to include food prices in inflation measures, as they impact nearly 50% of household expenditures in India.

Question for practice:

Examine the potential impact of excluding food prices from India’s inflation targeting on households and the effectiveness of current inflation control measures.