Economic Survey's pitch for excluding food from inflation target

The Economic Survey has called for a “re-examining” of the existing inflation-targeting framework adopted by the central bank, pitching for the exclusion of food items, prices of which are often driven by supply constraints rather than demand shocks.

The Reserve Bank of India (RBI) has been targeting headline inflation based on the consumer price index (CPI) since the introduction of the framework in 2016. It’s mandated to keep retail inflation at 4%, with a tolerance band of 2 percentage points, which shapes its monetary policies, especially the interest rates.

“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,” the survey said.


Food items have been a key driver of retail inflation in India in most part of the last two years, even as core inflation has been trending down, especially since FY23. For instance, retail inflation in June hit 5.08%, while food inflation remained as high as 9.36%.

Separately, at a press briefing, chief economic advisor V Anantha Nageswaran said monetary policy is “not a tool to manage aggregate supply shocks and food shocks are predominantly supply shocks”. He, however, acknowledged differing views on this issue, and also pointed to the ongoing debate, even in the developed world, about the right inflation targeting metric.

The survey argued that when central banks in developing countries target headline inflation, they effectively target food prices, given the high weight of such items in the inflation gauge (food accounts for more than 40% in the CPI). So, any spike in food prices threatens the inflation target, prompting the central bank to appeal to the government to bring down the food rates.

“That prevents farmers from benefiting from the rise in terms of trade in their favour,” it added.

Hardships caused by higher food prices for poor and low-income consumers can be addressed through direct benefit transfers or coupons for specified purchases valid for appropriate durations, the survey said.

“Globally, every central bank targets the CPI and there is no reason why we should be different. Once we target the CPI, then we need to stick to headline inflation,” said Madan Sabnavis, chief economist at Bank of Baroda.

Sabnavis said in the past when India targeted inflation based on the wholesale price index (WPI) unofficially, “we had situations where the CPI was high and we lowered interest rate saying WPI is low. It is then we moved to the global concept”, he added.

CPI revamp
The survey called for expedited efforts to revamp the current CPI with updated product baskets and weights, and also to construct the producer price index for goods and services.

It said the short-term inflation outlook for India is benign. But for longer-term price stability, greater efforts must be made to boost the domestic production of edible oils and pulses, of which India is a large importer.

It suggested linking price monitoring data for essential food items gathered by different departments in such a way that the build-up of prices from the farm gate to the final consumer is quantifiable and monitorable.