Shah raised concerns about whether the free food distributed to over 80 crore Indians under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) is accounted for when measuring food inflation. The program, which provides free or subsidised food grains to a vast segment of the population, could impact the headline food inflation number, Shah suggested. “My only submission will be are we measuring food inflation correctly? For example, 80 crore Indians are provided free food. That cost is more than our fiscal deficit. Is the credit taken in food inflation?” said Shah while speaking at a Kotak MF event.
The Complex Issue of Food Inflation
Shah explained that the issue of food inflation is not straightforward and requires further scrutiny. He emphasised that the provision of free food could result in a lower inflation figure, which might not reflect the actual impact on households. While the government’s effort to provide free food to the poor is crucial, Shah questioned whether this is properly factored into the inflation data used for policymaking.
While the Economic Advisory Council (EAC-PM) has not yet deliberated on this matter, Shah’s comments are in line with ongoing debates on food inflation in India. In July 2024, Chief Economic Advisor V Anantha Nageswaran proposed excluding food inflation from policy formulation, which sparked a vigorous debate within policy circles. The Reserve Bank of India (RBI) has resisted such a move, underscoring the complexities involved in handling food inflation within the broader inflation framework.
Global Practices and India’s Inflation Debate
Shah also pointed to differing practices in other countries when it comes to measuring inflation. He noted that in the United States, core inflation is often used for policy decisions because the relative spending on food is much lower in developed economies. This approach contrasts with India, where food forms a larger part of household budgets. However, Shah acknowledged that traditional economics views inflation, whether food-related or not, as a monetary phenomenon. “Is there one right or wrong answer? The answer is no. There are perspectives and we should let the Reserve Bank of India and Finance Ministry take a call on it,” he said.
Capital Expenditure and Slowing Growth Concerns
On broader economic concerns, Shah spoke about the need for the government to boost capital expenditure in the second half of the fiscal year. With the fiscal year ending in March 2025, Shah believes that a stronger push for capital spending is crucial to counter the slower-than-expected growth witnessed in the second quarter of 2024, which saw a growth rate of just 5.4%.Shah pointed to a noticeable slowdown in the growth of GST collections since May 2024, which have been trailing behind nominal GDP growth. He noted that this slowdown could be a sign of a deeper economic challenge, suggesting that the government would need to focus on accelerating expenditure to support growth in the latter half of the year.
Global Economic Shifts and India’s Opportunities
Shah also highlighted the ongoing tariff war between the US and China as a significant opportunity for India. He argued that India must capitalise on this geopolitical shift by improving the domestic business environment. Shah believes that simplifying the ease of doing business will enable Indian entrepreneurs to make the most of these global changes and boost India’s economic growth.
Mutual Fund Outlook and Investor Guidance
Shah advised mutual fund investors to adopt a “neutral” stance, suggesting that they should not expect the extraordinary returns that have characterised the past few years. With foreign portfolio investors (FPIs) pulling back from the market recently, Shah noted that domestic investments have prevented a market correction, but investors have not been able to find stocks at bargain prices like in March 2020.
In terms of the outlook for debt schemes, Shah cautioned investors not to expect double-digit returns, as they have been accustomed to in recent years. He clarified that future returns may be more modest and advised investors to adjust their expectations accordingly.
(With inputs from PTI)