Both the Reserve Bank of India and the Finance Ministry have pointed out that if inflation is allowed to run unchecked, it can undermine the prospects of the real economy. The RBI’s Monetary Policy Committee kept its key interest rate unchanged in its last meeting held in December citing inflationary concerns. The central bank had raised its inflation forecast for this fiscal year at 4.8%.
While Shaktikanta Das and three others had votes against cuts, two members had voted in support of slashing rates in December meeting. “I believe that a rate cut would help in reviving economic growth without worsening the inflationary situation, which may soften with seasonal correction in prices. Hence, I will again vote for a 25-basis point cut in the repo rate while keeping a neutral stance. In addition, we should also explore the use of non-rate measures for enhancing liquidity, such as a 50-basis point cut in CRR, to help enhance liquidity,” Dr Nagesh, member of MPC who voted in support of cuts said, according to the MPC minutes shared by the central bank. Before MPC met for the December meeting, Union Minister Nirmala Sitharaman and Piyush Goyal had voiced their opinion that rate cuts remain essential at that point.
Retail inflation surged to 6.2% in October, marking the fastest rise in over a year, primarily driven by volatile food prices. Food inflation print spiked to a 15-month high of 10.9%, lifting retail inflation beyond the RBI’s target of 4% and even its tolerance band of 2-6%. For the month of December, retail inflation had somewhat eased to 5.48 per cent but was still above RBI’s tolerance band.
Major contributors to high inflation have been high food prices which are the cause for demand slowdown in India, and aligning inflation to the central bank’s 4% target is key to ensuring sustained economic growth, minutes of the RBI’s latest policy meeting showed.
What can Budget 2025 include?
The Economic Survey 2024 recommended that India’s inflation targeting framework exclude food prices, as food inflation is primarily supply-driven rather than demand-driven. It suggested that the government should address food inflation through supply-side measures rather than relying on the RBI to manage it with demand-side tools. The upcoming Bugdet can also promote technological innovations and solutions (such as blockchain and AI) to digitise these supply chains, track inventory and predict weather-based adversaries, thereby reducing wastage and improving forecasting.
“We anticipate a focus on long-term solutions aimed at strengthening the agricultural value chain, incentivising production and addressing structural supply-side issues that add to the delivery cost. In the short term, we expect the government to go with Direct Benefit Transfer (DBTs) and food coupons to support rural consumption, as rural inflation is higher and affects rural demand,” said Deloitte in its expectations for the upcoming Budget.
Furthermore, the 2025 Budget can unleash long-term initiatives, such as value chain development projects that could address the sudden surge in food prices and reduce post-harvest losses.
Additionally, to curb food prices, the Budget can bring in a measure to develop a network of cold storage facilities and warehouses at the district and village levels to minimise post-harvest losses and ensure a steady food supply throughout the year. “Promote digital marketplaces that expand platforms such as eNAM (National Agricultural Market) to provide farmers direct access to buyers, reducing dependency on intermediaries. Ensure that food distribution programmes such as PDS (Public Distribution System) work efficiently to cushion the poorest sections from food inflation,” said Deloitte in a report.
