No sooner did the Reserve Bank of India (RBI) take heart on the potency of a strenuous cycle of monetary tightening than a domestic vegetable supply shock upset its calculations. While the stubbornness of “core inflation” was the main worry cited by the RBI during the February policy review, that narrative has since been turned on its head. Core inflation eased in July, extending a softening bias that set in February, but the headline rate surged to a 15-month high of 7.44%, primarily because an “unprecedented shock to tomato prices” spilled over to prices of other vegetables. Also, inflation in cereals refuses to yield, despite steps to ease supplies like a ban on export of white rice, while some other items in the food basket, like spices, too, have turned costlier.
Worse, the global inflation environment isn’t turning for the better. This is even as the global growth is slowing after a strong first quarter. On the domestic front, however, the situation is conducive for growth impulses, with the output gap having turned positive in Q4FY23, for the first time since late FY20. Demand conditions are improving across sectors, and may remain buoyant for the next three quarters. Most high-frequency indicators are in the green. Fixed capital formation is gaining momentum, though exports are down. To dampen these emerging impulses would be discomfitting, but the RBI would doubtless accord precedence to warding off any danger to macro-stability. It is obvious that the central bank is once again caught in a cleft stick, as far as growth is concerned, and the pivot to rate cuts is apparently being pushed back.
There are a few things in the domain of government policy that need to move in closer concert with monetary policy. As the RBI highlighted in the latest State of the Economy report, rising global temperatures and heavier/uneven monsoons are likely to be more recurrent in the world, with the onset of an era of “global boiling.” This is bound to have adverse consequences for crops and harvests, including India’s. The latest instance of kharif sowing patterns being hit by early monsoon arrival in north and northwest India, and the quick drying out of rains since late July is illustrative. El Nino conditions are likely to impact the coming rabi crop. Farm-sector reforms aimed at remunerative prices to farmers and investments in supply chains are imperative to cushion the food supply shocks. Geopolitics-driven supply problems for oil and other basic commodities need to be addressed with pre-emptive steps, like a shift to fuels that reduce import reliance.
Moreover, the inflation index and its base year must be revised quickly and this must continue with frequent periodicity. The consumer price index (CPI), developed using data captured over a decade ago, has since seen no change in composition or base-year. This is despite a perceptible shift in household consumption pattern in a structurally changing economy. Food price index has a weight of nearly 30% in CPI now, while relevant food items are perceived to have much lower share in consumption basket of larger segments of people. Also, consumption has gravitated much towards the high-income groups after the launch of CPI, requiring higher representation of the items they purchase in the index, including newer services and electronic gadgets. While monetary objectives characteristically require constant readjustments, predicating it on fallible data is fraught with risks.