Spending on food goes up, inflation real challenge
The new household consumption survey data show spending on food items has gone up in 2023-24 vis-a-vis the previous year. The share of food in total spending in rural households increased to 47.04 percent in 2023-24 from 46.4 percent in 2022-23. In urban households, the average share of food items increased from 39.17 percent of the overall spending in 2022-23 to 39.68 percent in 2023-24. Even though the year-on-year increase is not very large and is still 500-600 basis points lower than the share of spending on food in 2011-12, the data indicate that high food inflation in the previous year did impact household consumption patterns.
In fact, the 8-9 percent increase in household consumption in 2023-24 was largely due to inflation. If inflation is eliminated, consumption in the real term has increased by only 3.5 percent, which is much lower than the real Gross Domestic Product (GDP) growth rate of 8.2 percent in FY24. The data show that real consumption growth is in a slow lane, and analysts have blamed high inflation, especially food inflation, for this trend. The government has tried addressing this issue by looking at the supply-side constraints, but they have yielded limited results. Typically, the measures adopted include stock limits, a ban on exports of certain food items and vegetables, and lowering import duties on items like edible oil. While these measures have been successful in taming food inflation to some extent, the overdependence on rain for agriculture is a significant hindrance in keeping inflation in check.
High food inflation continues to result in higher retail inflation, preventing the central bank from cutting rates, which, according to many, has resulted in anaemic growth in second-quarter GDP. There has been a growing call for keeping food inflation out of the equation while deciding the interest rates. However, the Reserve Bank of India (RBI) has not bitten the bullet on this yet and has been resisting the temptation to do so. But things may change next year. India is considering adopting a new base year by late 2025 or early 2026. The new base year would most likely be 2022-23, and this would result in lower weightage to food in the Consumer Price Index (CPI). In a way, it could address the high inflation issue temporarily, but food inflation would remain a challenge.