## It's Mostly Food: How to Tame Indian Inflation

_IMF Blog, March 10, 2016_

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## Bibliographic details
- Authors: Rahul Anand, Paul Cashin
- Published: March 10, 2016

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### Overview and context
- Authors: Rahul Anand, Paul Cashin
- Publication date: March 10, 2016
- Topic: Analysis of inflation in India with emphasis on food inflation and implications for monetary policy under India’s flexible inflation targeting framework.
- Historical trajectory cited:
  - Inflation trended higher from the mid-2000s.
  - It reached 10–11 percent by 2008.
  - Inflation fell by almost half in 2014, but inflation expectations remained high.
- Quotation: Reserve Bank of India Governor Raghuram Rajan: “inflation is a destructive disease … we can’t push inflation under the carpet as a central banker. We have to deal with it.”

### Key findings — causes, persistence, and transmission
- Food inflation in emerging markets (including India) is more volatile and persistent than in advanced economies.
- Food inflation developments in India over the past decade largely reflect demand pressures driven by strong private consumption growth, which have often outpaced supply of key food commodities.
- Inflation has costs:
  - It hurts growth.
  - It worsens inequality.
  - There is an inflation-growth threshold effect in the Indian states with persistently elevated consumer price index inflation rates of over 5½ percent.
  - Higher non-food inflation is associated with worsening income inequality in both urban and rural areas.
- Inflation dynamics in Nepal and Bhutan are closely linked to those in India.

### Policy implications and recommendations (Part III)
- Food inflation developments matter because:
  - The share of food expenditure is high in total household expenditure.
  - Food inflation informs inflation expectations and wages.
  - Second-round effects of food inflation are large in India, implying monetary policy must respond to large and persistent food price shocks.
- Policy stance on inflation targeting:
  - Analysis suggests responding to headline inflation rather than core inflation is welfare superior and often better to mitigate consumption and output fluctuations.
  - Sustaining the long-term inflation target of 4 percent under India’s recently adopted flexible inflation targeting framework depends on:
    - Enhancing food supply,
    - Agricultural market-based pricing,
    - Reducing price distortions.
  - In the absence of a stronger food supply growth response, food inflation may exceed nonfood inflation by 2½–3 percentage points per year.
- Reserve Bank of India guidance:
  - Given high costs of inflation, the Reserve Bank of India needs to balance the short-term growth-inflation trade-off, in light of the long-term negative effects on growth of persistently high inflation.

### Notable chapter and data approach
- Chapter 4 highlights:
  - Use of micro level data (household survey data) to investigate demand and supply factors underpinning relative food price inflation.
  - Analysis of non-monetary factors responsible for relative food price inflation.
  - Policy advice aimed at achieving inflation targets under India’s flexible inflation targeting framework.

*Source: It's Mostly Food: How to Tame Indian Inflation, Rahul Anand and Paul Cashin, March 10, 2016.*

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## References

- [inflation in India](http://www.imf.org/external/pubs/ft/survey/so/2016/CAR030216A.htm)

_Source: https://www.imf.org/en/blogs/articles/2016/03/10/its-mostly-food-how-to-tame-indian-inflation_