Govt move to exclude food items from inflation calculation sparks debate

In a shift in methodology that could redefine how inflation is calculated in India, the Union government is reportedly considering excluding food items from the Consumer Price Index (CPI) basket, a move that has triggered a debate among economists and policymakers.

This proposal, currently under discussion by a panel within the statistics ministry, suggests reducing the weight of food in the CPI by as much as eight percentage points, down from its current level of 54.2 per cent.

This proposal comes in the wake of India's chief economic adviser V. Anantha Nageswaran arguing that the Reserve Bank of India's (RBI) inflation target should exclude food items.

He maintains that food prices, which are often volatile and influenced by weather conditions, should not be a focus of monetary policy, which is traditionally geared towards managing demand-side inflation.

However, this approach has been met with criticism from several quarters. Prominent among the critics is Pronab Sen, India's former chief statistician, who recently pointed out that the RBI's interest rate adjustments do not directly impact food prices.

Sen advocates for fiscal policy interventions to manage food inflation rather than redefining the CPI basket to downplay the role of food items. He argues that such a redefinition could misrepresent the real inflationary pressures felt by the average Indian consumer, particularly in a country where food constitutes a significant portion of household expenditure.

The CPI in India is currently based on consumer spending patterns from the 2011-12 survey, which many economists believe is outdated. Newer surveys indicate that Indian consumers are now allocating a smaller share of their budgets to food, leading some to argue that the current CPI overstates inflation.

For instance, Bloomberg Economics estimates that inflation in June would have been 70 basis points lower if the new weights were applied.

Nevertheless, the food and beverage category continues to be a major driver of inflation, with food prices rising by 9.36 per cent in June 2024 compared to the previous year, pushing the overall inflation rate to 5.08 per cent. Excluding food and energy, the inflation rate would have been a more modest 3.15 per cent.

The debate extends to the broader implications of this potential policy shift. Compared to developed countries like the United States, where food accounts for just 15 per cent of the CPI basket, or emerging economies like Brazil, China, and South Africa, where it ranges between 20 and 25 per cent, India’s heavy reliance on food in its CPI calculation makes inflation targeting through monetary policy particularly challenging.

Critics argue that while it might be easier for countries with a smaller food share to manage inflation through interest rates, India’s unique economic structure and consumer behaviour require a more nuanced approach that includes food items in the inflation targeting framework.

The government’s proposal has also sparked political reactions. Congress MP and general-secretary (communications) Jairam Ramesh took to social media, questioning whether the move was "brilliant Modi-nomics" or a "cruel joke on the people of India," highlighting the potential social and economic ramifications of such a policy change.

As the debate continues, the government faces the challenge of balancing the need for accurate inflation data with the realities of the Indian economy, where food remains a crucial component of consumer spending.