A complicating factor peculiar to India is the multiplicity of inflation rates. Should one target wholesale (WPI) or retail (CPI) inflation, or core inflation, which is defined as non-fuel, non-food inflation? In the past, WPI and CPI inflation moved closely together, so ambiguity on which rate to focus on was not such an issue. But over the last five years, they have diverged largely due to food inflation that has a bigger weight in the composition of the CPI. So why is food inflation so high and why does it persist?

One explanation is that the procurement price for cereals has been rising very rapidly, above the rise in the cost of production. Over the last five years, the procurement price of cereals has increased over cost of production by almost 15-60% for a cumulative differential of around 150% over a five-year period. So, the food subsidy has doubled from around Rs 40,000 crore in 2008-09 to over Rs 80,000 crore in 2012-13, and is likely to rise further in 2013-14 as the new food Bill is implemented and the issue price at which grain is sold is reduced. Read More