The implementation of the Food Safety and Standards Act, 2006 has run into rough weather.  The Act consolidates eight laws[1] governing the food sector and establishes the Food Safety and Standards Authority (FSSA) as the regulator.  It requires all food business operators (including small businesses and street vendors) to obtain a licence or registration.  The Regulations under FSSA related to procedure for obtaining a licence or registration was notified on August 1, 2011.  According to the Regulations, all food business operators had to get a licence or registration within one year of the notification.  Due to opposition from several food business operators (see here and here), the FSSA has now extended the deadline for getting a licence or registration by another six months (till February 2013).  However, some of the key concerns regarding the law have not yet been addressed.

Key issues related to the Bill raised by PRS (for more details see Legislative Brief)

  • The organised as well as the unorganised food sectors are required to follow the same food law.  The unorganised sector, such as street vendors, might have difficulty in adhering to the law, for example, with regard to specifications on ingredients, traceability and recall procedures.
  • The Bill does not require any specific standards for potable water (which is usually provided by local authorities).  It is the responsibility of the person preparing or manufacturing food to ensure that he uses water of requisite quality even when tap water does not meet the required safety standards.
  • The Bill excludes plants prior to harvesting and animal feed from its purview.  Thus, it does not control the entry of pesticides and antibiotics into the food at its source.
  • The power to suspend the license of any food operator is given to a local level officer.  This offers scope for harassment and corruption.

Other issues referred to in the media

  • The Act requires a food business operator to get different licenses if articles of food are manufactured or sold at different premises.  Newspapers reported that this provision was challenged in the Madras High Court but a stay order on the Act and its Rules was refused.
  • According to media reports, two hotel associations in Karnataka had challenged certain sections of the Act and Rules in the Karnataka High Court related to requirement of technical person for supervision of production process and requirement of a laboratory on the premises of food operators.  The court stayed these provisions for three months (till October 2012).
  • News papers reported that the Supreme Court is examining the question whether liquor is a food.

[1].  (a) The Prevention of Food Adulteration Act, 1954.  (b) The Fruit Products Order, 1955.  (c) The Meat Food Products Order, 1973. (d)  The Vegetable Oil Products (Control) Order, 1947.  (e) The Edible Oils Packaging (Regulation) Order, 1998. (f) The Solvent Extracted Oil, De oiled Meal, and Edible Flour (Control) Order, 1967. (g) The Milk and Milk Products Order, 1992. (h) Any other order issued under the Essential Commodities Act, 1955, relating to food.

The Monetary Policy Committee (MPC) has decided to conduct an off-cycle meeting today to discuss the failure to meet the inflation target under Section 45ZN of the Reserve Bank of India Act, 1934. As per the Reserve Bank of India Act (RBI), 1934, MPC is required to meet at least four times each year, to discuss the macroeconomic issues in the country, and take policy decisions to address those. This is the second time MPC has conducted an off-cycle meeting in 2022-23. The meeting is scheduled in light of inflation being consistently high for nine consecutive months.

In this blog, we discuss what the inflation targeting framework is, examine retail and wholesale prices, and the divergence between them.   

What is the inflation targeting framework, and what happens if inflation is persistently high?

In 2016, Parliament amended the RBI Act, 1934 to change the monetary policy, and introduce an inflation targeting framework. This framework prioritises price stability to achieve sustainable GDP growth. Price stability allows investors to confidently invest their money for productive activities, without worrying about it losing value. Price stability also maintains the purchasing power of consumers, i.e., the ability to purchase a good (or service) with a given amount of money.

As per the new framework, the central government, in consultation with RBI sets: (i) an inflation target, and (ii) an upper and lower tolerance level for retail inflation. The target has been set at 4%, with an upper tolerance limit of 6% and a lower tolerance limit of 2%. The upper and lower limits indicate that although it is desirable for inflation to be close to 4%, deviation between these limits is acceptable. The target and bands are revised every five years. In March 2021, the existing targets were carried forward.  

Retail inflation has been above 6% for the past nine months, and it has been above 4% from October 2019 onwards (See Figure 1).

Figure 1: Consumer price index (year-on-year; in percentage)

image

Sources: Database on Indian Economy, Reserve Bank of India; PRS.

If inflation is above or below the prescribed limits for three quarters, RBI must submit a report to the central government explaining why prices have been rising (or falling) persistently, what will be done to correct that, and an estimate as to when the target will be achieved.   

The MPC uses tools such as interest rates to control the level of inflation in the economy. One such rate is the policy repo rate, which is the rate at which RBI lends money to banks. An increase in the policy repo rate makes borrowing money more costly, and hence is expected to control inflation by reducing the money supply. MPC increased this rate from 4% in April 2022 to 4.4% in May 2022, to 4.9% in June 2022, to 5.4% in August 2022, and to 5.9% in September 2022.

Breaking down the Consumer Price Index and the Wholesale Price Index

Consumer Price Index (CPI) measures the general prices of goods and services such as food, clothing, and fuel over time. Retail inflation is calculated as the change in the CPI over a period of time. Goods and services such as petrol, food products, health, and education are considered for its calculation, which are assigned different weights (See Table 1). Between February 2022 and August 2022, the average annual inflation was 6.9%. The rise in prices of subcomponents of the CPI during this period is indicated in Table 2.

Table 1: Assigned weights for the calculation of CPI

Category

Weight

Food and beverages

46%

Miscellaneous (including petrol and diesel, health, and education)

28%

Housing

10%

Clothing and footwear

7%

Fuel and light

7%

Pan, tobacco, and intoxications

2%

Total

100%

Sources: MOSPI; PRS.

Table 2: Average inflation of some CPI components
between February 2022 to August 2022 (in percentage)

Subcategory of CPI

Average inflation

Vegetables 

13.26%

Oils and fats

12.46%

Footwear

11.41%

Fuel and Light

9.88%

Transport and communication

7.74%

Cereals and products

6.05%

Sources: Database on Indian Economy, RBI; PRS.

CPI is not the only index that measures inflation in an economy. The Wholesale Price Index (WPI) measures the wholesale prices of goods. A change in wholesale prices reflects wholesale inflation. Table 3 indicates the weights assigned to goods for calculating the WPI. Manufactured goods include metals, chemicals, food products, and textiles.   

Primary articles (23%) include food articles, and crude petroleum and natural gas. Fuel and power (12%) include mineral oils, electricity, and coal.  WPI has remained above 10% from April 2021 onwards. It reached an all-time high of 17% in May 2022. This was driven by the inflation in metals, kerosene and petroleum coke, fruits and vegetables, and palm oil.

Table 3:Assigned weights for the
calculation of WPI (in percentage)

Category

Weight

Manufactured products

64%

Primary articles

23%

Fuel and power

12%

All commodities

100%

Sources: Ministry of Commerce and Industry; PRS.

Why has WPI inflation been consistently above CPI inflation?

Movements in the WPI have an impact on the CPI.  For almost a year and half, CPI inflation has remained below WPI inflation.  However, as per the design of the indices, it is expected that CPI would remain above WPI, and that any increase in WPI would reflect in the CPI after a time lag.  This is because retail prices include taxes (as a percentage of price), while wholesale prices do not.  Additionally, some of the goods in WPI act as inputs in the goods considered in CPI.  An increase in input prices would lead to higher retail prices after a time lag.

We discuss possible reasons for why CPI has remained below WPI for a year and a half.

Figure 2: Consumer Price Index and Wholesale Price Index

image

Sources: Database on Indian Economy, Reserve Bank of India; PRS.

Composition of indices

As indicated in Table 2 and 3, the composition of the two indices varies. For instance, prices of manufacture of basic metals, chemicals, and machinery grew at an average rate of 13% between February 2021 and September 2022.  They contribute 7% to the WPI. These are input goods for producing final goods and services such as automobiles, which are included in the CPI. The rise in prices of transport vehicles, communication devices, fuel for transport, and housing (CPI components) rose by 6% during this period.

The Ministry of Finance has observed that wholesale prices did not feed into retail prices (from March 2021 onwards) as wholesalers absorbed the rising input costs and did not pass them on to retailers. In August 2022, it noted that as retail prices are rising now, the pass-through may occur.