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In September this year, India will complete 8 years since it implemented Inflation Targeting (IT). Consistent with the experience of other countries, in India too, IT has been credited with improved outcomes: gentler and less volatile headline inflation; anchored inflationary expectations; improved communication and transparency; enhanced transmission of monetary policy; greater independence of the central bank; better coordination with the fiscal authorities; and smooth conduct of exchange rate and reserve management policies in response to external shocks.

The RBI has remained as committed to a ‘multiple indicators’ approach as it was before the formal adoption of IT. A text analysis of its statements shows that the monetary policy committee considers a range of factors before arriving at a decision, such as drivers of inflation, dynamics of food and core inflation, liquidity situation, global economic environment and risk appetite, output gap, capacity utilization, inflationary expectations, exchange rate, employment, and fiscal deficit.

Despite this apparent successful run, there are periodic calls to make changes in the IT framework. One such proposal is that instead of CPI headline which includes demand- induced volatile food prices, core inflation or WPI inflation should be targeted. In the most direct official statement to this effect, the latest Economic Survey has proposed that “India’s inflation targeting framework should consider targeting core inflation, excluding food”.

The arguments in favour are that monetary policy is ineffective in combating supply- driven food inflation; food inflation is higher than the core inflation resulting in tighter monetary policy; and that food prices are volatile necessitating frequent policy changes.

The counter-arguments are the following. First, food inflation impacts both core inflation and overall inflationary expectations. Ignoring it can unanchor inflationary expectations and undo the past successes of IT.

Second, WPI is a poor substitute. It consists of wholesale prices, not retail prices; and of only manufacturing (64 percent weight) and commodities, while excluding services altogether.

Third, food price inflation has not been higher than core inflation. While it has been more volatile than core inflation, but less volatile than WPI inflation.

Table 1: Comparing Average Level and Volatility of
Different Inflation Series during September 2016 – June 2024

Finally, defying some of the earlier scepticism, IT has not made the RBI overly hawkish or reactive to every small deviation in inflation rate from its target of 4 percent or to every spike in food inflation.

Since September 2016, the RBI has changed the key policy rate 17 times, majority of them during two turbulent years. The first time in 2019-20 when the policy rate was eased five times by a cumulative 185 basis points in order to respond to a sharp growth slowdown. And again in 2022-23 when the policy rate was increased six times by a cumulative 210 basis points in response to accelerated inflation emanating from global shocks. During the remaining 6 years, the policy rate was changed only six times, about once every year.

But what if food prices become even more volatile during the coming years, due to climate change- induced heat waves and erratic rain patterns?

The answer lies in updating the CPI headline basket. The current basket accords a weight of 45.8 percent to food. The basket was calculated in 2011-12 and has not been revised since then, even though per capita incomes have nearly doubled meanwhile.

In order to project the correct weight of food in India’s consumption basket, we estimated the relationship between the share of food and per capita income across countries; and a similar relationship for the Indian states. The estimates robustly confirm that the share of food in consumption declines as income levels increase. While a Bangladeshi spends 45 percent on food, a Vietnamese spends 33 percent; a Brazilian 24 percent; and a South Korean only 14 percent.  Similar dispersion is seen across Indian states (as of 2011-12).

The estimated weight of food for India at today’s per capita income would be less than 40 percent instead of the current 45.8 percent; and would decline to below 30 percent in a decade from now. This correction itself should ameliorate the concerns on account of food inflation being a part of the inflation target.

Does it mean that India needs no review or revision of its IT framework at all?

Not really. In fact, it would be useful to conduct an independent review around issues such as: Is a 4 percent target inflation still appropriate? Should India make its tolerance band of 2-6 percent narrower? Or should it move from targeting an inflation level within a band, to just targeting a narrower band of say 4-6 percent, with no explicit point target?

The writer is director general of National Council of Applied Economic Research. Views are personal.

Our climate vision demands a radical rethink: Balancing growth with sustainability while challenging global norms and pushing for equitable solutions.

India, the world’s third-largest emitter of greenhouse gases, finds itself at the crossroads of development and environmental sustainability. The global approach to climate change, heavily focused on reducing carbon emissions through renewable energy adoption, overlooks India’s unique socio-economic and geographical challenges.

This one-size-fits all strategy is fundamentally flawed and could undermine the effectiveness of India’s climate efforts, as argued in the Economic Survey 2023-24. The global strategy to combat climate change revolves around climate adaptation and mitigation, with an emphasis on renewable energy, energy efficiency and cutting methane emissions. While these goals are attainable for developed countries, they are far more challenging for India. The country’s population exceeds 1.4 billion, and the demand for energy to fuel its development is immense.

Despite this, India’s per capita emissions remain at around 2.8 tonnes of CO2 equivalent per year, compared to eight tonnes in the EU and 16 tonness in the US. Renewable energy sources such as solar and wind are often seen as the ultimate solution to climate change. However, the transition to renewables is not without significant challenges. For instance, the production of solar panels and wind turbines requires substantial amounts of rare earth metals such as lithium, cobalt, and nickel. These materials are primarily extracted from countries with poor labour and environmental standards. The extraction process is energy-intensive and environmentally destructive, leading to a paradox where the pursuit of clean energy contributes to environmental degradation.

Moreover, renewable energy sources are intermittent. Solar and wind power generation depends on weather conditions, necessitating substantial storage capacities to ensure a stable power supply. This storage requirement further exacerbates the environmental impact, as battery production involves additional mining and resource extraction. India faces a unique set of challenges in its quest to reduce carbon emissions. The country’s heavy reliance on coal for industrial processes, power generation, and transportation makes transitioning to cleaner energy sources particularly difficult.

Approximately 70 per cent of India’s electricity comes from coal, highlighting the scale of the challenge. The financial burden of this transition is another major hurdle. Developing countries such as India require approximately $6 trillion by 2030 to meet their climate targets. However, only $100 billion was pledged by developed nations till 2020, with an actual provision of just $83.3 billion. This financing gap makes it nearly impossible for India to make the necessary investments in clean energy infrastructure and technology.

A critical flaw in the current climate strategy is its failure to address overconsumption in developed countries. High-income nations are responsible for the majority of global emissions, with the top 10 per cent of emitters averaging 22 tonnes of CO2 per year, over 200 times the emissions of the bottom 10 per cent. Despite this, the focus remains on technological solutions rather than addressing the root cause of the problem: excessive consumption.

For instance, the average American consumes 12,700 kWh of electricity annually, compared to just 185 kWh in Africa. This disparity underscores the need for a more holistic approach to climate action that includes lifestyle changes and reduced consumption in developed countries, alongside technological advancements. India must advocate for a climate strategy that reflects its developmental needs and capabilities. This involves investing in clean energy technologies that are suited to its unique context, such as small-scale solar and wind projects, improving energy efficiency in industries, and promoting sustainable agricultural practices.

Additionally, India should leverage its position as a leader in the Global South to push for more equitable climate policies that hold developed nations accountable for their historical emissions and current consumption patterns. To truly address the climate crisis, the global community must adopt a more nuanced and equitable approach. This includes recognisng the historical emissions of developed countries and providing adequate financial and technological support to developing nations. It also means shifting the focus from merely substituting fossil fuels with renewables to promoting sustainable consumption and lifestyle changes.

The current global approach to climate change is fundamentally flawed and insufficient to address the unique challenges faced by India. A more equitable and sustainable strategy is needed—one that recognises the interconnected nature of climate, development, and consumption and provides the necessary support for all nations to achieve their climate goals.

India’s climate strategy must be rethought to ensure that it is not only effective but also just and inclusive, allowing the country to continue its development while contributing to global climate efforts.

Souryabrata Mohapatra is an Associate Fellow at NCAER in New Delhi.

India stands out as a beacon of hope, demonstrating unwavering commitment through innovative climate initiatives and sustainable practices.

This year’s record spell of an intense heatwave in Delhi, during which temperatures touched 50°C, highlighted concerns over the adverse effects of climate change globally. India remains a beacon of hope through its actions as part of the global efforts to stem climate change. Through myriad initiatives, the country has demonstrated its unwavering commitment to environmental sustainability.

India’s journey toward climate action began in 2009 when the country voluntarily pledged to reduce the emissions intensity of its GDP by 20-25% by 2020 compared to 2005 levels. Impressively, India achieved a 24% reduction within the stipulated timeframe. In alignment with the Paris Agreement, India submitted its Nationally Determined Contributions (NDCs) to the UNFCCC in 2015, setting forth eight ambitious targets for 2021-2030, further reinforcing its commitment to combating climate change.

Tree plantation and forest conservation are at the heart of India’s environmental efforts. Through programs like the National Mission for Green India and the Compensatory Afforestation Fund Management and Planning Authority (CAMPA), India encourages the use of barren land for tree plantations.

The country ranks third globally in net forest area gain, with 21.71% of its geographical area covered by forests. Initiatives like the Green Credit Program further incentivize tree plantation and forest restoration. India’s commitment to wetland conservation is equally impressive, with 80 designated Ramsar sites. The Mangrove Initiative for Shoreline Habitats and Tangible Incomes (MISHTI) aims to promote and conserve mangroves, which are vital for carbon storage and marine biodiversity.

The country has implemented the Plastic Waste Management Amendment Rules, 2021, banning the use of single-use plastics. Renewable energy is another area in which India excels. The National Green Hydrogen Mission, launched in January 2023, aims to position India as a leader in green hydrogen technology. The country ranks fourth globally in renewable energy capacity.

India’s environmental initiatives extend beyond its borders. The country plays a pivotal role in global platforms such as the Global Alliance for Circular Economy and Resource Efficiency. India has made notable strides in addressing climate change, earning a commendable 7th place in this year’s Climate Change Performance Index (CCPI), up one spot from last year, making it one of the highest performers globally.

India’s high ranking in the GHG Emissions and Energy Use categories underscores the country’s efforts to manage its environmental impact despite its large population. Notably, India’s per capita emissions remain relatively low, aligning with global benchmarks aimed at limiting temperature rise to well below 2°C above the pre-industrial average.

However, the path forward is complex, and critical areas still require focused attention and accelerated action. India continues to rely heavily on coal, oil, and gas to meet its growing energy demands. This dependence is a major contributor to GHG emissions and severe air pollution, especially in urban areas. While there is a slight positive trend in the adoption of renewable energy, the pace of this transition is too slow to meet urgent climate goals.

Despite high marks in emissions and energy use, India receives a medium rating in Climate Policy and Renewable Energy. The country has clear long-term policies focusing on renewable energy, including the domestic manufacturing of renewable energy components. Yet, the implementation of these policies needs to be more effective.

The COP26 announcement by Prime Minister Modi, setting a net-zero emissions target for 2070, has been criticized by experts for lacking ambition. The call for a faster phase-out of coal, reduced reliance on gas, and a significant expansion of renewable energy is strong.

India’s heavy reliance on coal presents a significant challenge. Despite high taxes on petrol and diesel, consumption has not decreased. Some experts view these taxes as effective, while others highlight the government’s dependence on the revenue they generate.

The rephrasing from ‘phase-out’ to ‘phase-down’ for fossil fuels, championed by India and China at the last COP, was a setback for global climate commitments. Large-scale renewable energy projects in India have also faced criticism for negatively affecting local communities through land grabs and unequal resource distribution. Policies have been largely mitigative rather than transformative, often overlooking adaptation and disaster risk management. There is a growing call for policies that incorporate ecosystem-based solutions and prioritize equity, ensuring that climate actions benefit all segments of society. India needs a more bottom-up approach to policy implementation, incorporating the needs and demands of tribal and rural communities.

Souryabrata Mohapatra is an associate fellow at NCAER. Views are personal.