FOOD INFLATION IN INDIA (Syllabus: GS Paper 3 – Economy)

Context: The Reserve Bank of India's commitment to align headline inflation with the 4 per cent target faces a potential challenge as rising food prices have been identified as the sole threat, as highlighted in the central bank's recently released 'State of the Economy' report.

Key Highlights of the Report

• Food items’ weighting is approximately 40% in the CPI basket. Vegetables, constituting 13.2% of the CPI-food and beverages basket, have historically played a significant role in driving food inflation.
• According to the report, disinflationary monetary policy is working its way through the economy, steadily mitigating underlying inflationary pressures.
• The report highlighted the consumer inflation rate fell to its lowest level in three months.
• The report highlighted an escalation in global risks due to the emergence of a new conflict in West Asia, alongside the ongoing Russia-Ukraine war.

Measuring Food Inflation in India

• Price Indices: Each price index serves a distinct purpose and can be calculated based on producer, consumer, or wholesale prices.
• Product Price Index (PPI): It assesses the average selling prices of domestic producers for both goods and services, providing a perspective from the producer's point of view.
• Consumer Price Index (CPI): In contrast to the PPI, the Consumer Price Index (CPI) measures average prices from the consumer's standpoint, accounting for variations between seller and consumer prices.
• Factors Influencing Price Discrepancies: Seller and consumer prices can differ due to various factors, including taxes, subsidies, and market costs, highlighting the complexities in aligning producer and consumer perspectives within inflation measurements.
• Wholesale Price Index (WPI): WPI is designed to ideally gauge average wholesale market prices, specifically in bulk transactions, providing insights into the broader market dynamics where goods are sold in larger quantities.