Core inflation fell to 4-year low in fiscal 2024

Economic research 2024: Finance Minister Nirmala Sitharaman presented the Economic Survey 2024 ahead of the announcement of the Union Budget 2024 on Tuesday, July 23, in Parliament on Monday. The survey highlighted that during the fiscal year 24-25, proactive policy interventions by the central government and price stability measures implemented by the Reserve Bank of India helped stabilise retail inflation at 5.4 per cent, the lowest level since the pandemic.

Core inflation drops to 4-year low

In FY24, the decline in retail inflation was mainly driven by a decline in core inflation in both goods and services categories. Core services inflation hit a nine-year low during this period, while core goods inflation fell to a four-year low, the survey found.

During FY24, the consumer durables inflation rate declined on the back of improved supplies of essential raw materials to industries. This marked a positive shift after several years of rising consumer durables inflation from FY20 to FY23.

In response to rising inflationary pressures, the Reserve Bank of India (RBI) raised the repo rate in a stepwise manner by 250 basis points from May 2022. As a result, core inflation fell by around 4 percentage points between April 2022 and June 2024.

Policy interventions

In FY24, the global energy price index declined significantly, according to the economic survey. At the same time, the central government cut prices of LPG, petrol and diesel, keeping fuel inflation low throughout the year.

In August 2023, domestic LPG cylinder prices were reduced by Rs 200 per cylinder across all Indian markets, ushering in a period of deflation in LPG inflation from September 2023. Similarly, the central government reduced petrol and diesel prices by Rs 2 per litre in March 2024. India’s strategic policies effectively navigated global uncertainties and ensured stability in prices despite the prevailing challenges, the study said.

Adverse weather impact on food prices

Food inflation has been a global concern over the past two years, exacerbated by challenges in India’s agriculture sector such as extreme weather events, depleted reservoirs and crop damage. The study revealed that these factors had a significant impact on agricultural production and food prices, leading to food inflation rates of 6.6 per cent in FY23 and 7.5 per cent in FY24.

In FY24, adverse weather conditions further restricted food production. Specific challenges included crop diseases affecting tomatoes, early monsoon rains and logistical disruptions. Moreover, onion prices rose due to rainfall during the last harvest season affecting the quality of rabi onion, delayed sowing of kharif onion, prolonged droughts affecting kharif production and trade-related measures by other countries.

The study found that despite these challenges, the government implemented effective administrative measures. These included dynamic inventory management, open market operations, subsidized supply of essential food items and strategic trade policy measures, which helped mitigate the impact of food inflation.

Rural and urban inflation is rising

In FY24, most states and union territories saw lower inflation rates, with 29 out of 36 registering rates below 6 per cent, in line with the overall decline in average retail inflation across India compared to FY23, the survey said. States with higher food prices tend to exhibit higher rural inflation due to the higher share of food in the rural consumption basket. Moreover, rural areas exhibit more significant variation in inflation across states compared to urban areas. Moreover, states with higher overall inflation rates tend to have a wider gap between rural and urban inflation, with rural inflation outpacing urban inflation.

Future outlook

The short-term outlook appears positive, with the RBI forecasting inflation to fall to 4.5 percent in FY25 and 4.1 percent in FY26, assuming normal monsoon and no external or policy shocks. The IMF also forecasts inflation to be 4.6 percent in 2024 and 4.2 percent in 2025 for India. In addition, the World Bank expects a decline in global commodity prices in 2024 and 2025, driven by lower costs of energy, food and fertilizers, which could reduce domestic inflation.

However, to ensure long-term price stability, a progressive approach is needed. Therefore, assessing progress in developing modern storage and processing facilities for fruits and vegetables is crucial for controlling seasonal price increases. Moreover, improving price monitoring mechanisms and market information and focusing on increasing domestic production of essential food items such as pulses and edible oils, on which India is heavily dependent on imports, will shape the medium to long-term inflation outlook.

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