Retail inflation remained at 5.4 percent due to timely intervention of the government and measures of RBI: Economic Survey

The Economic Survey 2024, tabled in Parliament by Union Finance Minister Nirmala Sitharaman on Monday, said that despite the pandemic and geopolitical tensions, timely policy interventions of the central government and price stability measures of the Reserve Bank of India helped contain retail inflation at 5.4 per cent.

The Covid-19 pandemic, geopolitical tensions and supply disruptions contributed to rising inflationary pressures globally during FY22 and FY23. Consumer goods and services in India faced price hikes due to the impact of international conflicts and adverse weather conditions on food costs, the survey said.

However, in FY24, timely policy interventions by the central government and price stability measures by the Reserve Bank of India helped contain retail inflation at 5.4 per cent, the lowest since the pandemic, he/she said, adding that the policy interventions yielded positive results.

The global energy price index witnessed a sharp decline in FY24. On the other hand, the central government announced a cut in the prices of LPG, petrol and diesel. This resulted in lower retail fuel inflation in FY24, the survey said.

The price of domestic LPG cylinders was reduced by Rs 200 per cylinder across all markets in India in August 2023. Since then, LPG inflation has been in the deflation zone starting from September 2023.

Similarly, the central government reduced the prices of petrol and diesel by Rs 2 per liter in March 2024. As a result, the retail inflation of petrol and diesel used in vehicles also moved into deflation territory in March 2024.

India’s policy responded skilfully to the challenges, ensuring price stability despite global uncertainties and bringing core inflation to a 4-year low.

The decline in retail inflation in FY24 was led by a decline in core inflation – both goods and services. Core services inflation fell to a nine-year low in FY24; at the same time, core goods inflation also fell to a four-year low.

In FY24, core consumer durables inflation declined due to better supply of key input materials to industries. This was a welcome change after the gradual increase in consumer durables inflation between FY20 and FY23.

The impact of monetary policy on core inflation was clear. In response to rising inflationary pressures, the RBI has gradually increased the repo rate by 250 basis points since May 2022. As a result, core inflation has declined by about four percentage points between April 2022 and June 2024, the survey said.

The Economic Survey said that food prices are under pressure due to adverse weather conditions. Food inflation has been a global concern over the last two years. In India, the agriculture sector faced challenges due to extreme weather events, depleted water reserves and crop damage, which impacted agricultural production and food prices. As a result, food inflation stood at 6.6 per cent in FY23 and increased to 7.5 per cent in FY24.

Adverse weather conditions disrupted food production in FY24. Tomato prices rose due to region-specific crop diseases, premature monsoon rains and logistics disruptions. Onion prices rose due to rains during the previous crop season affecting the quality of Rabi onions, delay in sowing of Kharif onions, impact of prolonged drought on Kharif production and trade-related measures by other countries.

However, the survey said the government has taken appropriate administrative measures, including dynamic stock management, open market operations, subsidised provision of essential food items and trade policy measures, which have helped in moderating food inflation.

The Economic Survey pointed out that in FY24, most states and union territories witnessed a decline in inflation rates, with 29 out of 36 recording rates below 6 per cent – ​​which is in line with the overall decline in the all-India average retail inflation compared to FY23.

The survey says that in states where food prices are higher, rural inflation is higher because of the greater weight of food items in the rural consumption basket. Additionally, inter-state variation in inflation is more pronounced in rural areas than in urban areas.

Further, states that experience higher overall inflation have a larger rural-urban inflation gap, with rural inflation being higher than urban inflation.

The Economic Survey said the RBI estimates that in the event of a normal monsoon and no external or policy shocks, inflation will decline to 4.5 per cent in FY25 and 4.1 per cent in FY26. Similarly, the IMF has projected inflation for India at 4.6 per cent in 2024 and 4.2 per cent in 2025.

In addition, the World Bank predicts a decline in global commodity prices in 2024 and 2025, led by lower prices of energy, food and fertilizer. It said this could help reduce domestic inflation in India.

The Survey states that a clear visionary approach is required to achieve long-term price stability. Hence, it is important to assess the progress in developing modern storage and processing facilities for fruits and vegetables to control seasonal price increases.

It further said that the medium- to long-term inflation outlook will be shaped by strengthening price monitoring mechanisms and market intelligence, as well as focused efforts to increase domestic production of essential food items such as pulses and edible oils, for which India is heavily dependent on imports.