Budget 2024: The Task To Tame Wild Food Prices! Common Man Expects More Money In Pockets To Beat Inflation

While Union Budget is pivotal for India Inc, it also has everything to do with Indians personal finances, especially when common man is looking to create true wealth against high inflation. Options are many! In fact, India has a vast pool of investment schemes from govt-backed to traditional old FDs to risky-and-sentiment-driven stock markets. But the question remains, how much wealth have you created on your savings and investments? And why Budget and inflation play a key role in it?

Let's take an example! If citizen A invests Rs 1,00,000 in FDs for 1-year, and the rate of return he or she receives is around 7%. Then how much pure gains have you made? Against, consumer price index (CPI) inflation which is currently at 5.08%, real wealth creation is merely 1.92%. And that is less!

Why bother about inflation? In simple terms, inflation is a broad spectrum of prices of goods and services across the economy. As per IMF.org, in an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation.

Also, IMF pointed out that inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.

Example! IMG explains in detail with the example of a pensioner who receives a fixed 5% yearly increase to their pension. IMF added, if inflation is higher than 5 per cent, a pensioner's purchasing power falls. On the other hand, a borrower who pays a fixed-rate mortgage of 5 percent would benefit from 5 percent inflation, because the real interest rate (the nominal rate minus the inflation rate) would be zero; servicing this debt would be even easier if inflation were higher, as long as the borrower's income keeps up with inflation.

Current scenario of India's CPI inflation:

CPI inflation or retail inflation shot up to hit 4-month high at 5.08% in June 2024, owing to a sharp surge in food prices. Nonetheless, this will be the tenth consecutive month where CPI inflation has stayed below RBI's upper tolerance limit. RBI has warned about food inflation and its uncertainty going ahead. With CPI increasing above the market's estimates, chances of an early rate cut look dim.

Meanwhile, in June 2024, consumer food price index (CFPI) inflation jumped to 9.55% compared to 8.83% in May 2024 and more than doubled from 4.55% print in June last year.

RBI expects CPI inflation to stay above its medium term target of 4% in FY25 to 4.5%. As per RBI, currently, overlapping shocks engendered by the rising incidence of adverse climate events impart considerable uncertainty to the food inflation trajectory.

In June month alone, a CRISIL report mentioned that on-year, the cost of a representative homecooked veg thali rose 10% in June, while that of the non-veg thali declined 4%.

The data of CRISIL MI&A Research revealed that the cost of the veg thali increased due to a surge of 30%, 46% and 59% on-year in prices of tomato, onion and potato (TOP), respectively, largely due to low base of last fiscal.

CRISIL added, "TOP prices surged because of lower onion arrivals due to significant drop in rabi acreage, decline in yield for potato crop due to unseasonal rainfall in March, and virus infestation in tomato summer crop due to high temperatures in key growing regions of Karnataka and Andhra Pradesh that tamped tomato arrivals down 35% on-year."

How does Budget play a key role that could tone down food prices:

For starters, the PM Modi-led government will have to implement measures that is focused on cushioning the surge in food prices.

Explaining in detail, HDFC Life Insurance blog highlighted that the Union Budget aids in controlling the economic fluctuations as well. It ensures proper handling of inflation and deflation, thus bringing about economic stability.

During inflation, surplus budget policies are implemented, while deficit budget policies are devised during deflation. This aids in maintaining a price stability in the economy, it added.

Apart from this, the RBI is tasked with modifying interest rates to bring down inflationary pressure. In case of high inflation, RBI hikes key rates which further increases lending and deposit rates at banks. In case of slowdown in inflationary surge, RBI starts to trim rates which is a good news for borrowers since their loan rates will drop too, however, it is the opposite to depositors as their deposit rates will fall as well.

D. K. Srivastava, EY India Chief Policy Advisor on June 25, said that recently released NSO data highlight a robust real GDP and GVA growth performance of 8.2% and 7.2% respectively in 2023-24. Two noticeable features of this growth profile are (1) a large difference between real GDP and real GVA growth, and (2) a small difference of only 1.4% points between GDP growth at current and constant prices. The reason for the first feature is the increase in growth of net indirect taxes (indirect taxes minus subsidies) owing to a sharp fall in subsidies. The reason for the second feature is the relatively low implicit price deflator (IPD)-based inflation, estimated at 1.3% in 2023-24.

Further, Srivastava added that for 2024-25, we expect that both these features would be revised to their normal magnitudes. The RBI, in its June 2024 monetary policy review, has estimated a real GDP growth of 7.2% and a CPI inflation of 4.5% in FY25. Taking into account this projection of CPI inflation and a WPI inflation of about 3% (RBI's Professional Forecasters Survey - June 2024), the IPD-based inflation may be estimated at 3.6% considering an implicit weight of 60% for WPI inflation and 40% for CPI inflation.

Hence, EY's chief added that the nominal GDP growth in 2024-25 that should be considered in the upcoming budget is estimated at close to 11%.

Overall, Srivastava said that the upcoming budget for 2024-25 is likely to be used by the GoI to signal any changes in policies and preferences as well as to clearly laying down the foundation for robust medium-term growth and fiscal consolidation.

Finance Minister Nirmala Sitharaman will announce the Union Budget FY25 on July 23rd.