Let’s inflate growth: Food inflation is a matter of concern but growth revival should be the priority

Retail inflation in December surged to 7.35%, the highest level recorded in over five years. A rise in the level of prices in the backdrop of a slowdown in economic momentum and high unemployment has sparked concern. The concern is warranted. But the remedy requires a clear-sighted analysis of the primary problem facing the economy. The rise in retail inflation has been driven primarily by food prices. Within the food basket, it’s mainly vegetables which have pushed up the rate of inflation.

Food items make up a little less than half the spending in an average household’s consumption basket. Their price trend also happens to be particularly volatile, susceptible to sharp swings on account of factors beyond a government’s immediate control. Unlike the last bout of high inflation during the UPA-2 years, the current surge in headline inflation has been accompanied by a decline in core inflation. Core inflation, a measure of the price level of a household’s consumption basket after excluding food and fuel, is a good proxy of the robustness of consumption. Over the last year, core inflation has declined by about two percentage points to the present level of 3.5%.

Thus the primary economic challenge today is the growth slowdown. While that does not in any way lessen the importance of food prices for consumers, the current surge in vegetable prices may turn out to be transitory. Yet, they also serve as a reminder that the government’s unfinished reform agenda includes agriculture. Sharp vegetable price swings are also due to the lack of supply-side reforms. Such reforms would reduce wastage and intermediation costs between farmers and consumers, benefiting both sides.

The core inflation is the most troublesome part of December’s inflation data. The current slowdown has exceeded 18 months and early revival is unlikely. Conventional monetary tools such as interest rate reductions are unlikely to meaningfully impact growth as the financial sector is almost overwhelmed by bad loans and risk aversion. Government and RBI need to jointly work out a way to improve the quality of financial intermediation in India which will have a positive impact on both economic growth and transmission of monetary policy. The rise in food inflation cannot be taken lightly. Equally, policy makers shouldn’t lose sight of the fact that reviving growth is the priority.

This piece appeared as an editorial opinion in the print edition of The Times of India.

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