Household Food Budget Inflation as an Aid to Policy Formulation

Abstract

India has several price indices including the Consumer Price Indices and the Wholesale Price Index. Changes in WPI is taken as the headline inflation by the Central bank for policy administration. The policy makers and government also look at the CPI at several aggregate levels to aid policy decisions. However, both the WPI and CPI are not capable of highlighting the debilitating impact of high food price inflation on the poorer sections of the society and economy. It is very important that the impact of food inflation on household budgets is monitored and used as a test or trigger to pass any proposed policy or administrative measures.A model has been developed to evaluate the impact of Food Price Inflation on household consumption expenditure towards essential food items and the resulting impact on the availability of resources for Non-food expenditure and savings. Against the back drop of the recent food price inflation the study evaluates the impact on the different Deciles of Mumbai households with particular focus on the poorer sections/deciles. An index of the household food budget is created and inflation is measured using the index. In Indian context food is of critical importance given the absence of social security, wide spread poverty and malnutrition. A very high spend on Food leaves the poor with little access to Non-food expenditure and accentuates deprivation in health care and education. Policy makers and administrators need tools to trigger welfare spends and to justify their current strategies. The model discussed in this paper can serve such a purpose.