The paper by think-tank National Council of Applied Economic Research addresses the ongoing debate among policymakers over whether food prices should be stripped from inflation targeting. Economists argue that this approach is not feasible in a country like India, where food makes up nearly half of the consumer price index basket.
“Neglecting food price inflation that diverges from target for an extended period can have negative consequences,” economists including NCAER’s Poonam Gupta wrote in the study.
Instead, the authors suggest that reducing the weight of food in the consumer price basket is more suitable. They estimate that this weight could reduce to 30% within a decade due to the projected increase in per capita incomes, from the current 45.8%. In the short term, they recommend cutting it to 40%.
“This correction should ameliorate concerns about the design and practice of the current inflation-targeting regime,” wrote Gupta, who is also a part of the Prime Minister’s Economic Advisory Council.
The Reserve Bank of India currently has a mandate to keep headline inflation at the midpoint of a 2%-6% range. High food prices is the main reason for the central bank to have kept interest rates unchanged for over a year now. The inflation target is reviewed by the government every five years, with the next revision due in March 2026.Inflation in India has moderated significantly since the adoption of inflation targeting in 2016, both compared to the preceding years and relative to the global averages as well as low and middle-income countries, according to the National Council’s study.