India Inflation Basket Needs Urgent Revision, Economists Say
India’s retail inflation basket needs to be revised to improve the efficacy of monetary policy, according to a paper by a New Delhi-based economic policy think-tank.
(Bloomberg) -- India’s retail inflation basket needs to be revised to improve the efficacy of monetary policy, according to a paper by a New Delhi-based economic policy think-tank.
“Higher the weightage of food in overall CPI, the more cumbersome it is for monetary policy to contain inflation,” economists including Deepak Mishra and Ashok Gulati wrote. “The structure of headline inflation in India is quite different from the advanced economies which limits the efficacy of monetary policy in India,” they wrote.
Food and beverages constitute nearly 46% of India’s CPI basket. This is in contrast to many advanced economies where food weights are much lower, such as UK’s 9.3%, US’ 13.2% and Canada’s 15.94%.
The Reserve Bank of India uses retail inflation as a benchmark to set borrowing costs and targets inflation between 2%-6%. Prices have stayed above its mandated range since the beginning of the year, raising a clamor to update the consumer price inflation basket that has not been revised for over a decade.
“This corroborates the urgency to revise CPI with the latest consumption survey weights,” the researchers said. Policy measures need to focus on various supply-side bottlenecks, especially in food items which could be managed by increasing productivity by investing in research and development in agriculture, they said.
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