Economic Survey 2024: During FY22 and FY23, the COVID-19 pandemic, geopolitical tensions, and supply disruptions contributed to rising inflationary pressures globally. In India, consumer goods and services faced price hikes due to international conflicts and adverse weather conditions impacting food costs, according to the Economic Survey 2024.
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Finance Minister Nirmala Sitharaman tabled the annual survey in the Parliament on Monday with the start of the Budget session.
In FY24, the Central Government’s timely policy interventions and the Reserve Bank of India’s price stability measures helped maintain retail inflation at 5.4 per cent – the lowest level since the pandemic, it added.
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India’s retail inflation is lower than the EMDEs and world average
Despite the synchronous tightening of monetary policy by most central banks to restore price stability, the global economy has shown unexpected resilience in 2023. This is evident in both advanced economies (AEs), and emerging markets & developing economies (EMDEs), as they are returning to their inflation targets. This trend is also observed in India. As per the IMF data, where India’s inflation rate was lower than the global average and that of EMDEs in 2022 and 2023.
The policy interventions yielded positive results
The global energy price index experienced a sharp decline in FY24. On the other hand, the Central Government announced price cuts for LPG, petrol, and diesel. As a result, retail fuel inflation stays low in FY24.
In August 2023, the price of domestic LPG cylinders was reduced by Rs 200 per cylinder across all markets in India. Since then, LPG inflation has been in the deflationary zone, starting from September 2023.
Similarly, in March 2024, the Central Government lowered the prices of petrol and diesel by Rs 2 per litre. Consequently, retail inflation in petrol and diesel used in vehicles also moved to the deflationary zone in March 2024.
India’s policy adeptly steered through challenges, ensuring price stability despite global uncertainties
Core inflation declined to 4-years low
The decrease in retail inflation in FY24 was driven by a fall in core inflation – both goods and services. Core services inflation eased to a nine-year low in FY24; at the same time, core goods inflation also declined to a four-year low.
In FY24, core consumer durables inflation declined due to an improved supply of key input materials to industries. This was a welcome change after the progressive increase in consumer durables inflation between FY20 and FY23.
The transmission of monetary policy to core inflation was unambiguous. In response to rising inflationary pressure, the RBI has increased the repo rate gradually by 250 basis points since May 2022. Consequently, core inflation declined by around four percentage points between April 2022 and June 2024.
Food prices are under pressure due to adverse weather conditions
Food inflation has been a global concern over the past two years. Within India, the agriculture sector faced challenges due to extreme weather events, depleted reservoirs, and crop damage, which impacted farm output and food prices. Consequently, food inflation stood at 6.6 per cent in FY23 and increased to 7.5 per cent in FY24.
Unfavourable weather conditions in FY24 constrained food production. Tomato prices rose due to region-specific crop disease, early monsoon rains, and logistical disruptions. Onion prices spiked because of rainfall during the last harvest season affecting rabi onion quality, delayed sowing of Kharif onion, prolonged dry spells impacting Kharif production, and trade-related measures by other countries.
However, the government took appropriate administrative actions, including dynamic stock management, open market operations, subsidised provision of essential food items and trade policy measures, which helped to mitigate food inflation.
Higher inflation in States correlated with a wider rural-to-urban inflation gap
In FY24, most States and Union Territories witnessed decreased inflation rates, with 29 out of 36 recording rates below 6 per cent – consistent with the overall decline in all-India average retail inflation compared to FY23.
States with elevated food prices tend to experience higher rural inflation due to the greater weightage of food items in the rural consumption basket. Additionally, inter-state variation in inflation is more pronounced in rural areas than urban areas.
Besides, States experiencing higher overall inflation tend to have a wider rural-to-urban inflation gap, with rural inflation surpassing urban inflation.
The short-term outlook is positive, long term requires a clear vision
Going forward, the RBI projects inflation to fall to 4.5 per cent in FY25 and 4.1 per cent in FY26, assuming normal monsoon and no external or policy shocks. Similarly, the IMF forecasts inflation of 4.6 per cent in 2024 and 4.2 per cent in 2025 for India.
Further, the World Bank predicts declining global commodity prices in 2024 and 2025, driven by lower energy, food, and fertiliser prices. This may help bring down domestic inflation in India.
However, achieving long-term price stability requires a clear forward-looking vision. Hence assessing progress in developing modern storage and processing facilities for fruits and vegetables is crucial to manage seasonal price spikes.
Beyond this, the medium to long-term inflation outlook will be shaped by the strengthening of price monitoring mechanisms and market intelligence as well as focused efforts to increase the domestic production of essential food items like pulses and edible oils for which India has a great degree of import dependence.
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