New Delhi: Not all current food inflation is bad, as part of it arises from government subsidies that are boosting real incomes, according to Ram Singh, a member of the Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC). While the RBI plays a role in managing overall inflation, supply-side constraints affecting food inflation are something the government can address in the upcoming Budget 2025, Singh added.
Singh, one of only two MPC members who advocated for an interest rate cut in the December 2024 meeting, remains firm in his stance ahead of MPC’s next meeting in February.
Singh also suggested that cutting Goods and Services Tax (GST) rates is a more effective tool to stimulate middle-class demand than income tax cuts.
“When the last MPC meeting took place, we had the second quarter GDP data,” Singh, who also serves as the director of the Delhi School of Economics, told ThePrint in an interview. “Growth had slowed significantly, necessitating a shift in monetary policy to support it.”
He highlighted other indicators prompting a reassessment of inflation-targeting mechanisms and the efficacy of the current approach.
“I observed that inflation targeting and repo rates have little impact on food price volatility. We should look through some of this volatility, keeping growth in focus,” he explained. “Core inflation has been below four percent over the last two years and has been declining further in the past year.”
Singh noted that core inflation and GDP growth often move in tandem and argued that declining trends in both warranted monetary policy action, such as lowering interest rates, to spur growth.
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Singh emphasised the role of fiscal authorities at both central and state levels in balancing inflation and growth. “Budget 2025 is an opportunity for the government to demonstrate its commitment to addressing this trade-off,” he said.
Specifically, Singh pointed to food inflation and price volatility as areas where government action could make a significant difference. He proposed reallocating capital expenditure towards improving food storage infrastructure and tackling supply-side constraints.
“In the short term, this might drive up prices, but in the medium term, it would reduce food wastage and price frictions, ultimately lowering food costs,” Singh said.
He also called for reducing regulatory hurdles, such as caps on private-sector storage capacity, and improving transportation and market integration for agricultural produce.
Singh argued that food inflation is not solely a supply-side phenomenon but also has demand-side factors. “The Household Consumption Expenditure Survey 2023-24 shows that consumption levels have risen across all groups, with a healthier consumption basket. The share of food in overall expenditure has decreased,” he said.
Singh explained that while food inflation is high, people are increasingly spending on non-food items, a trend driven by rising disposable incomes due to government transfers, both cash and non-cash.
“To the extent that it is the income effect-driven demand increase, it is a good thing,” Singh said. “All food inflation is not bad and all of it does not hurt. Of course, we can do with lower food inflation but it looks like some of it is being driven by a good thing.”
Singh also argued that income tax cuts in Budget 2025 are not the best way to stimulate middle-class demand, given the structure of India’s taxation system.
Aggregate demand, estimated at seven percent growth by the Central Statistical Office, is buoyed by rural and luxury goods demand, but there are mixed signals from the middle class, he said. “Just over three crore people pay income tax, with one crore contributing 70 percent of the revenue. The remaining two crore, often considered middle class, are unlikely to benefit significantly from income tax cuts,” Singh explained.
He said GST cuts would have a broader impact as GST affects everyone, making the revenue sacrifice more widespread and beneficial to more sections of society. “Reducing GST rates would have a more pervasive effect, benefiting a larger population, including the middle class,” he added.
(Edited by Radifah Kabir)
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