Growth vs inflation debate: with food spends down, growth may get leg-up

As per the HCES findings for 2022-23, rural spending on food and beverages has dropped to 46.4% from 52.9% in 2011-12

India’s headline inflation is expected to trend down creating more room for monetary and fiscal policy to focus on spurring growth rather than fret over inflation, if the latest Household Consumption Expenditure Survey (HCES) that shows a lower proportion of food spends for both rural and urban consumers, is used to rejig the Consumer Price Index (CPI).

The CPI, which is currently based on the 2011-12 consumption spending survey, assigns a weightage of almost 54.2% for rural consumers’ food and beverages’ expenditure and 36.3% for urban consumers, with the combined weightage for such expenses by all households at nearly 46%.

As per the HCES findings for 2022-23, rural spending on food and beverages has dropped to 46.4% from 52.9% in 2011-12, while urban peers spent 39.2% of their overall monthly outgoes on food compared to 42.6% incurred 11 years earlier.

“I think this will have serious implications. There will have to be a complete recast of the CPI that the National Statistical Office [NSO] produces. What is driving inflation today is food, while core inflation is down,” remarked NITI Aayog CEO BVR Subrahmanyam.

“That’s what the Reserve Bank of India [RBI] also keeps saying… that food inflation is spiking, sometimes in onions, sometimes in vegetables, sometimes in pulses. Suddenly, if their share shrinks, your inflation will also probably go down and my suspicion is our inflation is over-reported,” he noted.

In January, core inflation, which excludes volatile energy and food prices, is estimated to have hit a record low of 3.7% in the current CPI data series which uses 2012 as a base year. However, food inflation stood at 8.3%, while food and beverages together clocked a 7.6% inflation.

Mr. Subrahmanyam stressed that rebalancing the CPI, with a lower share of food and cereals, will possibly lead to a reduction in retail inflation which will affect the RBI, which sets interest rates based on retail inflation trends. Economists broadly agreed with Mr. Subrahmanyam’s prognosis.