Chapter-3

PRICES AND INFLATION: UNDER CONTROL

Economy Survey 2023-2024: Revision Notes

INTRODUCTION

Inflation and Economic Growth

• Low and stable inflation crucial for sustained economic growth.
• Balancing inflation control and financial stability is challenging.
• Requires careful monitoring and timely actions.
• India achieved lowest retail inflation (5.4%) since pandemic in FY24 due to RBI’s commitment and government policies.

Global Inflation Trends

• Post-pandemic supply chain disruptions worsened by Russia-Ukraine war (FY23).
• Global inflation declined in FY24 due to reduced price shocks (energy), lower core inflation, and monetary tightening.
• Coordinated monetary tightening by major economies reduced global energy demand (IMF).
• India’s retail inflation lower than global and EMDE averages.

India’s Inflation Performance

• Global economy showed unexpected resilience in 2023, returning to inflation targets.
• India’s inflation rate lower than global and EMDE averages in 2022 and 2023 (IMF).
• Negative relationship between inflation and per capita GDP.
• Advanced economies historically have lower inflation due to established policies, economic stability, efficient markets, and stable currencies.
• India’s inflation management better than many countries.

Inflation Targets and India’s Performance

• Countries set inflation targets based on economic objectives, development level, economic structure, financial system, and inflation-growth trade-off.
• India’s inflation within target range of 2-6% in 2023.
• Lowest deviation from inflation target among USA, Germany, and France in 2021-2023.
• India’s inflation 1.4 percentage points below global average in 2023.
• Upcoming discussion on inflation trends, drivers (headline, core, food), state-wise variations, rural-urban differences, and fiscal measures.

Basic

1.Core Inflation vs. Headline Inflation

Core inflation measures price changes without volatile food and energy components, reflecting the underlying long-term trend. It helps assess the impact of rising prices on consumer income and aids central banks in making monetary policy decisions. Central banks often target core inflation as it better predicts future inflation and indicates underlying demand-side pressures.

Headline inflation, on the other hand, is the overall inflation rate, including food and energy prices. While it provides a broader picture, it can be misleading due to short-term fluctuations in these volatile components.

DOMESTIC RETAIL INFLATION

Inflation Trends in FY24

• Retail inflation gradually moderated in FY24.
• FY23 inflation primarily driven by high food inflation, with moderate core inflation.
• Russia-Ukraine war and domestic weather conditions contributed to food price pressures in FY23.

Monetary Policy Response

• Monetary policy tightened since May 2022, increasing repo rate by 250 basis points to 6.5%.
• Policy rate unchanged since February 2023, focusing on gradual withdrawal of accommodation.
• Persistent core inflation in FY23 declined to 3.1% in June 2024.

Fuel and Commodity Prices

• Sharp decline in global energy prices in FY24 led to low retail fuel inflation.
• Government’s LPG, petrol, and diesel price cuts contributed to lower inflation.
• LPG inflation in deflationary zone since September 2023.
• Petrol and diesel inflation in deflationary zone since March 2024.
• Decline in global commodity prices reduced imported inflation pressure.

Analysis

• Low fuel and core inflation contributed to downward trend in headline inflation despite food price volatility.
• Prudent administrative and monetary policies supported inflation moderation.
• Retail inflation stood at 5.1% in June 2024.
• Upcoming section to analyze core and food inflation trends.

 

CORE INFLATION DYNAMICS IN THE POST-PANDEMIC WORLD

Core Inflation Trends

• Core inflation hit a four-year low in FY24.
• Core inflation measures prices excluding food and energy.
• Core inflation increased in FY22 due to rising commodity prices.
• Core services inflation drove overall core inflation in FY23.
• Core inflation declined in FY24 due to moderation in both goods and services.
• Core services inflation reached a nine-year low in FY24.

Monetary Policy Impact

• RBI increased repo rate by 250 basis points since May 2022 to control inflation.
• Core inflation declined by around 4 percentage points between April 2022 and June 2024.

Core Services Inflation

• India’s core services inflation reached a nine-year low in FY24.
• Moderation in housing rental inflation contributed to the decline.

Consumer Durables Inflation

• Consumer durables inflation increased significantly between FY20 and FY23.
• Gold prices and clothing costs were major drivers in previous years.
• Consumer durables inflation declined in FY24 due to improved raw material supply.
• Record-high gold prices exerted upward pressure on durables inflation.

Core Consumer Non-Durables Inflation

• Excluding food and beverages and fuel, core consumer non-durables inflation declined sharply in FY23 and FY24.
• Changes in transport costs were a major factor.
• Subsequent sections will discuss food and beverages inflation.

FOOD INFLATION

Food Price Pressures

• Food inflation a global issue in past two years.
• Climate change increased food price vulnerability (heatwaves, uneven rainfall).
• Adverse weather conditions impacted agriculture in FY23 and FY24, leading to higher food prices.
• Consumer Food Price Index (CFPI) -based food inflation increased from 3.8% in FY22 to 7.5% in FY24.

Price Pressures in Major Food Items

• Vegetables and pulses production affected by adverse weather.
• Tomato prices increased due to seasonal factors, crop diseases, and logistics disruptions.
• Onion prices rose due to low quality rabi onions, delayed kharif sowing, and trade restrictions.
• Pulse prices increased due to low production in past two years.
• Milk prices increased due to decreased artificial inseminations and higher feed costs.

Government Interventions

• Government took measures like open market sales, retailing, and imports to ensure food supply.
• Pradhan Mantri Garib Kalyan Anna Yojana extended for five years.

Global Food Prices and Domestic Impact

• India heavily reliant on edible oil imports, making it sensitive to global prices.
• Food and Agriculture Organisation (FAO) edible oils price index correlated with domestic edible oil prices.
• Government monitors global market trends to ensure affordable edible oil supply.
• National Mission on Edible Oils – Oil Palm aims to increase domestic production.
• Sugar export restrictions helped stabilize domestic sugar prices despite global price volatility.

Basic

1. Consumer Food Price Inflation (CFPI)?

• Consumer Food Price Inflation, (CFPI) , is a specific measure of inflation that focuses exclusively on the price changes of food items in a consumer’s basket of goods and services.
• It calculates the rate at which the prices of food products consumed by the average household are increasing over time.
• CFPI is a sub-component of the broader Consumer Price Index (CPI), where the Reserve Bank Of India (RBI) uses CPI-Combined (CPI-C) for this purpose.
• CFPI tracks the price changes of a specific basket of food items that are commonly consumed by households, such as cereals, vegetables, fruits, dairy products, meat, and other food staples.

2.Consumer Price Index (CPI)

• CPI inflation, also known as retail inflation, is the rate at which the prices of goods and services that consumers buy for personal use increase over time.
• It measures the change in the cost of a basket of goods and services that are typically purchased by households, including food, clothing, housing, transportation, and medical care.

Four types of CPI are as follows:

1. CPI for Industrial Workers (IW).
2. CPI for Agricultural Labourer (AL).
3. CPI for Rural Labourer (RL).
4. CPI for Urban Non-Manual Employees (UNME).

Of these, the first three are compiled by the Labour Bureau in the Ministry of Labour and Employment. Fourth is compiled by the National Statistical Office (NSO) in the Ministry of Statistics and Programme Implementation.

Administrative measures to contain food inflation in FY24

Wheat/Atta

• Export of wheat flour, maida, and semolina banned since August 2022.  
• Stock limits imposed on wheat from June 2023 to March 2024.
• Bharat Atta introduced at ₹50/kg in November 2023.  
• Wheat and rice offloaded from central pool under open market sale.  

Rice/Paddy

• Export of broken rice banned in September 2022, non-basmati rice in July 2023.
• Floor price for basmati rice export fixed in October 2023.
• 20% export duty on parboiled rice until March 2024.  
• Mandatory stock declaration for rice/paddy by traders from February 2024.
• Bharat Rice introduced at ₹29/kg in February 2024.

Pulses

• Calibrated release of pulses from buffer stock.  
• Import duty on tur and urad reduced until March 2025.  
• Bharat Dal launched for chana, moong dal, and moong sabut.
• Significant pulse imports in FY24.

Onion

• Onion buffer increased from 1.00 LMT to 7.00 LMT in FY24.
• Onion released through retail sales, e-Nam auctions, and bulk sales.  
• Minimum Export Price on specific onion varieties from October to December 2023.
• Onion export banned from December 2023 to March 2024.  

Edible Oils

• Basic duty on crude palm, soyabean, and sunflower oil reduced to nil.  
• Agri-cess on oil reduced to 5%.  
• Reduced basic duty on refined soybean, sunflower, and palm oil extended until March 2025.  
• Free import of refined palm oils extended.  

Sugar

• Export restrictions on sugar extended beyond October 2023

INTERSTATE VARIATIONS IN RETAIL INFLATION

Interstate Inflation Variations

• All-India average retail inflation decreased in FY24 compared to FY23.
• Inflation less than 6% in 29 out of 36 states and UTs.

Rural vs Urban Inflation

• Rural consumption basket has higher food item weightage (47.3%) than urban (29.6%).
• States with higher food prices experienced higher rural inflation.
• Inter-state variation in rural inflation higher than urban inflation.
• States with higher overall inflation have wider rural-urban inflation gap.
• Positive correlation between overall inflation and rural-urban inflation ratio.
• Haryana had wider rural-urban inflation gap compared to Goa.

 

OUTLOOK AND WAY FORWARD

Inflation Projections

• RBI and IMF project gradual alignment of inflation towards target in FY26.
• RBI expects headline inflation of 4.5% in FY25 and 4.1% in FY26.
• IMF projects inflation of 4.6% in 2024 and 4.2% in 2025 for India.

Global Commodity Prices

• World Bank expects 3% decline in commodity price index in 2024 and 4% in 2025.
• Lower energy, food, and fertilizer prices driving decline.
• Base metal prices expected to rise due to increased industrial activity.
• Decline in commodity prices positive for domestic inflation outlook.

Long-Term Price Stability

• Increase domestic edible oil production to reduce import dependence.
• Expand pulse production, especially lentils, tur, and urad.
• Improve storage and processing facilities for vegetables.
• Enhance price monitoring system for early identification of price trends.
• Expedite construction of producer price index.
• Revise consumer price index with fresh weights and item baskets.

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