Statsguru: Can pricier loans tame food prices in India? Debate heats up

Retail food inflation hit the double-digit mark in October, the first time in 15 months, sparking a debate on the inflation-targeting framework. There have been varying voices from the government and the Mint Road in this regard.

 

While Finance Minister Nirmala Sitharaman advocated more benign bank interest rates to help industry raise its capacities, Commerce and Industry Minister Piyush Goyal has called the idea of using these rates to control food inflation an “absolutely flawed theory”. Chief Economic Advisor V Anantha Nageswaran, meanwhile, has noted that removing highly volatile items like tomatoes, onions, potatoes (TOP) and precious metals from the Consumer Price Index (CPI) calculation will bring the October headline inflation rate down by two percentage points to 4.2 per cent.

 

Though he did not make a direct comment on the debate this time around, Reserve Bank of India (RBI) Governor Shaktikanta Das had last month said that excluding volatile food prices from inflation targets would not align with the reality faced by the average consumer.

 

Agricultural output and food prices in India were significantly affected in 2022-23 and 2023-24, mainly due to unpredictable monsoons and the effects of climate change. As a result, the average rate of food inflation nearly doubled – from 3.8 per cent in 2021-22 to 6.6 per cent in 2022-23, and further to 7.5 per cent in 2023-24.

 

In October, food inflation increased to 10.87 per cent, the highest since July 2023. The level of food inflation has been higher than the headline, core and non-food numbers in 16 of the past 22 months (chart 1). 

 

In its latest decision in October, the RBI’s monetary policy committee kept the policy rate unchanged at 6.5 per cent amid an unabated inflation surge driven by food prices. The policy rate has remained steady since February 2023, when the RBI raised it by 25 basis points (chart 2). 

 

Among the TOP items, tomatoes continue to be a major concern, experiencing a dramatic price increase. In October, tomato prices saw a surge of 161.27 per cent, while onion and potato rates also continued to rise (chart 3). 

 

Intense heatwaves this summer, with a higher number of heatwave days, dramatically affected the output of summer crops, driving a significant increase in their prices (chart 4).   Besides, excessive rains also spoilt some crops.

 

Food inflation has been high in recent times in India and war-affected Russia among major and neighbouring economies (chart 5).    

 

Despite a decline, Indians have still spent more than one-third of their spending on food. The elevated prices have hit households, especially the rural ones, hard (chart 6).   In this connection, the free food programme of the government has provided some relief to the common man.