Tomatoes, Onions, Gold Driving India's CPI Inflation: CEA Nageswaran

Chief Economic Adviser V. Anantha Nageswaran explained that monetary policy is primarily a short-term tool for managing aggregate demand and is not well-suited to address supply-side shocks

This year's Economic Survey proposed that India’s inflation-targeting framework should exclude food inflation, given its unique drivers

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Chief Economic Adviser (CEA) V. Anantha Nageswaran said on Tuesday that the recent rise in Consumer Price Index (CPI)-based inflation is primarily driven by a small group of commodities. Nageswaran explained that excluding tomatoes, onions, potatoes (TOP), and gold and silver from the CPI calculation reveals a much lower headline inflation rate of just 4.2 per cent for October. Although these items make up only 3.4 per cent of the total CPI basket, they collectively contribute more than one-third of the 6.2 per cent inflation rate recorded for the month.

Speaking at the State Bank of India’s (SBI) annual business and economic conclave, Nageswaran stressed, “We know that CPI is being very much influenced by a few commodities. If you take out tomatoes, onions, potatoes, gold, and silver, the headline CPI rate is 4.2 per cent… the items that constitute a 3.4 per cent weight together account for more than one-third of the 6.2 per cent inflation rate we have seen for October.”

This year's Economic Survey proposed that India’s inflation-targeting framework should exclude food inflation, given its unique drivers. Chief Economic Adviser V. Anantha Nageswaran explained that monetary policy is primarily a short-term tool for managing aggregate demand and is not well-suited to address supply-side shocks. Since food inflation is largely driven by such supply shocks, it should be considered separately.

However, Reserve Bank of India (RBI) Governor Shaktikanta Das pointed out that, due to the significant share of food in the consumption basket, the Monetary Policy Committee (MPC) cannot overlook food inflation.

On the potential reintroduction of Trump-era tariffs, Nageswaran acknowledged that while this could affect India-US trade dynamics, the broader impact on India might not be entirely negative. While India currently runs a bilateral trade surplus with the US, new tariffs could exert pressure to reduce duties in specific sectors, which could, in turn, enhance India’s competitiveness. However, given the challenges facing global export growth—driven by slowdowns in Europe and China and the waning effects of US fiscal stimulus—India's reliance on exports as a primary growth driver remains limited.

Nageswaran observed that while certain policies present challenges, they also create positive opportunities for India, particularly by helping to keep energy prices affordable. He noted that, despite potential obstacles, the overall impact of these policies could tilt toward being more beneficial than detrimental.

Regarding urban consumption, Nageswaran stated that it is premature to conclude that the slowdown will be long-lasting. While some indicators, such as slowing volumes in fast-moving consumer goods (FMCG), suggest caution, other signs, like strong growth in Employees’ Provident Fund Organisation (EPFO) net subscriptions, robust Purchasing Managers’ Index (PMI) data, and stable e-commerce transaction volumes, do not point to a widespread, persistent slowdown. This mixed data makes it difficult to determine whether the slowdown is temporary or a more lasting trend.

Nageswaran also highlighted that India’s dual policy focus on promoting private transport and incentivising specific crops, like paddy and wheat, has significantly contributed to exacerbating air quality challenges.

“The massive encouragement we have given to private modes of transport and the policies with respect to the farm sector, which have incentivised only food grains—paddy and wheat—and not other forms of agricultural products, have combined to play this role in terms of keeping our air quality somewhat on the lower side,” he said. 

Regarding economic growth, Nageswaran emphasised that the next four years will be pivotal for India in ensuring affordable energy prices, which are essential to sustaining the country's growth rate of 6.5 per cent to 7 per cent.

“The next four years might be very important from the Indian standpoint in terms of keeping energy prices affordable, and that's very critical. If we have to sustain growth rates of between 6.5 per cent and 7 per cent, having affordable energy prices is very important,” he noted.