Inflation outlook 'benign', core inflation at 4-yr low: Economic Survey 2024

The Economic Survey 2023-2024 tabled in Parliament by Union Finance Minister Nirmala Sitharaman today says core inflation in India hit a four-year low in FY24, and that the short-term inflation outlook is "benign".

The Economic Survey says stubborn core services prices are a risk factor for the inflation outlook of advanced economies. "In contrast, India’s core services inflation reached a nine-year low in FY24, aided by moderation in housing rental inflation, with a significant increase in the stock of new houses in 2023."

Core inflation is measured by excluding food and energy items from CPI headline inflation. It assesses the underlying price trends by largely eliminating the impact of price volatilities arising from transitory supply shocks. Trends in core inflation are important in determining the contours of monetary policy.

The RBI and the IMF have projected that India's consumer price inflation will "progressively align towards the inflation target" in FY26. "Assuming a normal monsoon and no further external or policy shocks, the RBI expects headline inflation to be 4.5 per cent in FY25 and 4.1 per cent in FY26. IMF has projected an inflation rate of 4.6% in 2024 and 4.2% in 2025 for India," the Survey projects.

The World Bank also expects that the global supply of commodities will increase, and so will their demand due to improved industrial activity and trade growth. It projects a 3% in the commodity price index in 2024 and a 4% decrease in 2025, mainly driven by lower energy, food and fertiliser prices. The energy price index is expected to reduce due to significant declines in coal and natural gas prices this year. Fertiliser prices are likely to weaken but remain above 2015-2019 levels due to strong demand and export restrictions.

From the angle of long-term price stability, the Economic Survey 2023-24 suggests the domestic consumption of edible oils has been increasing faster than production, leading to increased import dependence. "To reverse this pattern and to stabilise domestic prices, it is important to make focused efforts to increase the production of major oilseeds such as sunflower and rapeseed & mustard and explore the potential of non-conventional oils such as rice bran oil and corn oil. The possibility of expanding the scope of the National Mission on Edible Oils beyond palm oil to other major oilseeds is worth an examination."

Additionally, India faces a "persistent deficit" in pulses and consequent price pressures. "Production of pulses is concentrated in a few states and districts...more efforts are needed to expand the area under pulses, particularly lentils, tur, and urad, in more districts and rice-fallow areas."

The survey suggests in view of the "continuing seasonal surges" in the prices of vegetables like tomato and onion, it is important to assess the progress in developing modern storage facilities conducive to such specific crops and evaluate the viability of such facilities whose services have highly seasonal demand.

The Survey also calls for fine-tuning and expediting the ongoing action in the administration of price flare-ups in specific items. "The high-frequency price monitoring data for essential food items collected by different departments may be linked in such a way that the build-up of prices at each stage from the farm gate to the final consumer is quantifiable and monitorable."

Moreover, the paper also calls for expediting the ongoing efforts to construct the producer price index for goods and services to have a greater grasp of episodes of cost-push inflation.