Food inflation is a concern – RBI

KAKALI DAS

We are eagerly anticipating India’s Union Budget 2024, which is notable for several reasons. Firstly, it will be the first budget presented during Prime Minister Modi’s third term. Additionally, it marks a return to a coalition budget after a decade. As a result, there is significant curiosity about its content and focus.

The growth is largely on track, with India’s GDP expanding by over 8% in the last financial year. However, inflation remains a concern, as even the Reserve Bank of India, the country’s central bank, has highlighted.

The RBI Governor states that growth has stabilized, so his focus is now clearly on inflation.

“The Reserve Bank of India Act mandates the RBI to maintain price stability, targeting an inflation rate of 4 percent. While keeping the objective of growth in mind, our primary focus is on price stability. Since growth is holding steady, we must now focus clearly and unambiguously on inflation.” – Shaktikanta Das, Governor, Reserve Bank of India

What is driving India’s inflation? And what can the Union Budget do to address it?

India’s overall inflation has been below 6% since September last year. In June 2024, it stood at 5.1%—not ideal, but still manageable.

The main issue appears to be food inflation. In India, food inflation was 7.9% in May, but it increased to 9.4% in June, marking a significant rise. Most experts attribute this to the recent heat wave, similar to last year. Last year’s food inflation was also blamed on weather conditions, leading us to assume that this price shock will be temporary.

However, the RBI disagrees. According to their latest bulletin: “The argument that food price shocks are transitory does not align with the actual experience over the past year—an extended period for a shock to be considered transitory!”

As a result, India’s persistent food inflation is contributing to the overall rise in prices.

The RBI’s inflation target is 4%, but as mentioned, the actual rate is over 5%. Can the Union Budget help address this issue?

India already allocates a significant portion of its budget to food and its cultivation. In the interim budget, food and fertilizer subsidies accounted for 8% of total spending. Food alone was allocated $24 billion, according to the interim projections.

Reports indicate that India will need to increase its spending by 11%. The food subsidy bill has doubled over the past decade, which is concerning for the government. Despite measures such as curbing grain exports, targeting hoarders, and extending free food programs, food inflation remains persistent.

In the current political climate, the only option is to continue addressing the issue. Despite their overall win, the BJP faced electoral setbacks in recent elections. They are now preparing for upcoming state polls, with three state elections—Maharashtra, Haryana, and Jharkhand—on the horizon.

Two of these states have BJP or allied governments, so we can expect some degree of populism this time, possibly including tax cuts.

Reports suggest that the finance minister is considering incentives for the salaried class, aiming to put more money in people’s pockets. However, there is a downside to this approach.

Increased spending could raise the country’s deficit and contribute to overall inflation. Therefore, India needs a holistic approach to address these issues. For instance, climate change is a persistent challenge, and our weather patterns will likely become more unpredictable.

It’s crucial to prepare farmers and make their output more resilient. Similarly, improving the efficiency of supply chains, including transport and storage, can reduce leakages and help bring down prices.

To achieve these goals, significant investments are needed. Modernizing the agricultural sector is essential, as free food programs are not a long-term solution. With 1.4 billion people to feed, food security is a major concern in India, and so is food inflation.

21-07-2024

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