Food inflation in policy formulation a complex issue, says EAC-PM member Shah

Nilesh Shah, a part-time member of the Economic Advisory Council to the Prime Minister, on Wednesday said that the debate on whether to include food inflation in policy formulation is a complex issue, and questioned if we are computing the number correctly.

Shah, who is the managing director and chief executive of Kotak Mutual Fund, questioned if the computation takes into account free food to over 80 crore Indians under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) while arriving at the number.

Making it clear that the EAC-PM is yet to deliberate on the issue, Shah said the free or subsidised food grains to 80 crore Indians will lead to a decline in the headline number but was quick to add that the 2-6 per cent inflation band given to the RBI will also need to undergo a change.

"My only submission will be 'are we measuring food inflation correctly?' For example, 80 crore Indians are provided free food. That cost is more than our fiscal deficit. Is the credit taken in food inflation?" he said, speaking at a Kotak MF event in Mumbai.

"There is a need to check if we are measuring food correctly," he said, stressing that the issue of food inflation is a very complex one.

In July, Chief Economic Advisor, V Anantha Nageswaran pitched for excluding food inflation from policy formulation which set it a fierce debate in policy circles with RBI resisting any such move.

Shah said different countries have different practices, and spoke about how the US operates by core inflation alone because the relative spending on food in the developed economy is far lesser.
However, traditional economics says that inflation is a monetary phenomenon, whether it is food or non-food, he added.

"Is there one right or wrong answer? The answer is no. There are perspectives and we should let the Reserve Bank of India and Finance Ministry take a call on it," he said.

Meanwhile, Shah also said that the government will have to draw up detailed plans on upping the capital expenditure in the remaining months of the fiscal year ending March 2025 to ensure that the heavy lift-off in the spends happens in the second half after slower spends in the first.

"The 5.4 per cent growth in Q2 is well below expectations, but the signs of the slowdown were visible for some time," he said.

Since May 2024, the growth in the GST collections is slower than the nominal GDP growth which is a telling sign, he said, adding that it continues to trail even as we expect a faster growth in H2.

The tariff war between the US and China presents us with the biggest opportunity for India, the MF industry veteran said.

There is, however, a need to improve the ease of doing business domestically so that the entrepreneurial energies are put to best use, he said.

Kotak MF feels investors should be 'neutral' about the mutual fund's space and not expect the bumper returns of the last four years, an official said.

On the foreign portfolio investors' sell-off lately, Shah said while domestic money has ensured that there is no correction in the market, they've not been able to pick stocks for cheap like they were able to do in March 2020.

Shah said investors should not expect the double-digit returns on the debt schemes going ahead, as they have been used to recently.