Centre may put food inflation on a crash diet

In order to check rising consumer price inflation numbers, which often tie the Reserve Bank of India’s hands in reducing interest rates, the Centre may soon readjust the consumer price index by reducing the weight of the food. Food accounts for nearly half of the total weight of the CPI index at present and its sudden rise leads to a sharp spike in the headline inflation numbers.

Food has nearly 46% weight in the CPI index, which is based on the 2011 expenditure survey. But experts feel that in the past 10 years, consumption has changed sharply and the proportion of income spent on food, even by the poor, is far less now.

“The weight of food needs to be reduced to reflect the current consumption pattern,” said an official, adding that the new consumption expenditure survey to be launched in April may form the basis of a reworked CPI index.

For most of 2020, retail inflation grew much beyond the RBI’s upper band of 6%. The government has mandated the central bank to keep inflation within the range of 4% with a margin of 2% on either side. The rise in retail inflation was largely due to volatile and seasonal food prices.

Late last year, the government had cut the weight of food in the CPI for industrial workers to 39% from 46%.

Alongside the readjustment of the CPI index, the government, in March, will also review the inflation target to be followed by the RBI for the next five years. It is expected that the government will raise the target to 6% from the current 4%.

“Price stability is the foundation on which the economy can strive to reach its potential in a virtuous cycle of higher financial savings and investment; reduced uncertainties for firms in investment and wage decisions; reduced term and risk premia in financial markets; and increased external competitiveness,” the RBI said, advocating a review in the inflation target.