As the debate regarding removing food prices from the inflation-targeting framework has picked up pace in recent months, a study has suggested that the country should not alter the framework, as doing so would have negative consequences. A paper by the National Council of Applied Economics Research (NCAER) has advised that food-price inflation should not be disregarded.
The paper stated that in India, food is a much more important component of the consumption basket and the approach of looking through fluctuations in food and fuel price inflation without consequences for core inflation might not work as far as India is concerned.
The paper titled ‘Inflation Targeting in India: A Further Assessment’ by Barry Eichengreen and Poonam Gupta emphasised, “Whereas central banks in advanced economies have been able to look through fluctuations in food and fuel price inflation without consequences for core inflation and therefore without jeopardising their inflation targets, in India, where food is a much more important component of consumption baskets, this may not be the case.”
“Neglecting food price inflation that diverges from target for an extended period can have negative consequences,” the paper further stated. The current headline consumer price index (CPI) basket accords a weight of 45.8 per cent to food and beverages. The paper highlighted that the weight is inappropriate and needs to be brought down to 40 per cent.
“The share of food in consumption declines as income levels increase. While a Bangladeshi spends 45 per cent on food, a Vietnamese spends 33 per cent and a South Korean spends only 14 per cent on food. Similar dispersion is seen across Indian states,” the paper highlighted.
NCAER’s paper advocated for cutting down the weight accorded to food in the CPI basket by stating, “The estimated weight of food for India at today’s per capita income would be closer to 40 per cent instead of the current 45.8 per cent. It would likely further decline to around 30 per cent in a decade from now, due to the projected increase in per capita income levels.”
As far as the Reserve Bank of India’s inflation-targeting regime is concerned, the paper advised against radical changes in this regard. “The RBI’s inflation targeting regime has worked well. Given this record, radical changes such as broadening its mandate or abandoning the target in favour of a more discretionary regime would be risky and counterproductive,” mentioned in the paper.
