Remove Food from Inflation Target, Top Economist Argues
RBI cutting rates would be a huge win for increasing India’s economic growth projections, Governor Das has insisted it is not possible until price growth subsides to its 4 percent target. Food prices, which have risen 6.3 percent, have played a massive role in pressure on prices. A potential solution? Stop counting food inflation.
On its surface, a radical idea. However, the government’s chief economist recently argued in his primary policy document that food prices should be excluded from the central bank’s inflation target. He argues that the central bank can do little about the supply-side problems driving food inflation, and it distracts monetary policy from focusing on demand-side issues. For example, grain prices in India are largely set by government mandates on how much farmers should be paid. India closely tracks its rainfall, as a poor or strong monsoon season can usually explain nearly all of the volatility in food prices. Currently, India is amidst a weak monsoon season, which holds a lot of blame for rising food costs that the RBI can do little to address.
India also already overweights food in its consumer price index, which is 45 percent of the basket. Mihir Sharma, in his Bloomberg Opinion piece, argues that a high weight on food is a relic of India’s poverty-struck past. Now, as the middle class grows, food costs are taking a smaller piece of income.
“One of India’s problems is that, even as it grows richer, it struggles to change policies to match. Economic frameworks designed for when it was a much poorer country constrain and limit growth,” Sharma writes.
RBI will likely not change its CPI weighting. Firstly, it is not a good look to change how you keep score when you’re behind. Secondly, food prices still drive Indians’ expectations for future price growth and because of its large agricultural economy, quickly can become entrenched in the broader economy. However, countries like Indonesia have already become comfortable frequently adjusting their basket of goods to reflect the evolving spending patterns of its people.
