Economic Survey 2021: Greater Focus On Core Inflation Warranted

The Economic Survey has argued in favor of a greater focus on core inflation as the nominal anchor to drive policy making. The comments, which may or may not reflect the view of the government, come ahead of a scheduled review of India’s flexible inflation target of 4 (+/-2)%.

A sole focus on combined CPI inflation may not be appropriate for four reasons, the Survey said:

• Food inflation, which contributes significantly to CPI is driven primarily by supply-side factors.
• Given its role as the headline target for monetary policy, changes in CPI anchor inflation expectations. This occurs despite inflation in CPI being driven by supply side factors that drive food inflation.
• Several components of food inflation are transitory with wide variations within the food and beverages group.
• While food habits have undergone revisions over the decade since 2011-12, which is the CPI base year, the same is not reflected in the index yet. The base year of CPI therefore needs to be revised to overcome the measurement error that may be arising from the change in food habits.

A review of the inflation target comes up in March. That scheduled review, however, is intended to relook at the target of 4 (+/-2)% and not the chosen nominal anchor of headline CPI inflation.

Contrary to the Economic Survey’s suggestion, the Reserve Bank of India had suggested continuing with the existing inflation target, in a recent paper.

Commenting on the inflation scenario in the year gone by, the Economic Survey said that the rise in inflation amid the Covid-19 crisis was possibly due to the initial disruptions caused by the lockdown. “By November 2020, price momentum has moderated significantly for most sub groups and coupled with positive base effect helped ease inflation,” the Survey said.

The wide variation in regional inflation continued. Inflation ranged between 3.2-11% across states and Union Territories in 2020-21 compared to (-) 0.3% to 7.6% a year ago.

“During the year, the government took several measures to make crucial drugs for Covid-19 treatment available at affordable prices, to stabilise prices of sensitive food items like banning of export of onions, imposition of stock limit on onions, easing of restriction on imports of pulses etc,” the Survey said.

The Survey called for consistency in import policy of sensitive food items. In addition, “to rein in the vegetable inflation, review of relevant buffer stock policies is essential.”