Industrial production came in at a healthy 5.9% for the month of May. Importantly, the data hints at revival in private consumption demand for manufactured products — consumer goods demand ticked up nicely.

The prospects remain healthy as the Purchasing Manager Index (PMI) for manufacturing improved in June. Services PMI, too, was in strong expansion zone at 60.5. Despite moderating to 2.6%, merchandise exports grew at 5.8% during the first quarter.

A spike in food inflation to 9.4% in June lifted headline Consumer Price Index (CPI) to 5.1% over 4.8% in May. The Wholesale Price Index inflation came in at a 16-month high at 3.4%.

Food inflation has been stubbornly high for the past several months due to inclement weather. Unseasonal rains and heatwaves accentuated by climate change have impacted food production and prices.

Vegetable inflation spiked at 28% in the first quarter of this year from 15% in fiscal 2024. Foodgrain inflation too was in double digits. Non-food inflation on the other hand was a benign 2.3%.

Food inflation is a major policy challenge at this juncture because:

• Food has a high weight of 39% in CPI inflation. Without lowering food inflation, headline inflation cannot be brought down to 4% on a durable basis
• Without inflation getting aligned to the 4% target, Reserve Bank of India (RBI) is unlikely to cut rates as growth too remains strong
• Food inflation hits the poor more. Our assessment shows that the top
  

An enduring decline in food inflation, particularly vegetable inflation, will require measures for adapting to climate change as well as structural measures such as improving storage and food processing. This was a task cut out for the forthcoming full Union Budget for this fiscal.

While making way for spending in different areas to address weak consumption, food inflation and maintaining momentum on infrastructure buildout, the budget has to ensure that it does not stray from the fiscal consolidation path.

This month’s theme dwells on the issue of why fiscal consolidation is so important for India. It also evaluates the two choices before the government when it presented the budget on July 23. The first choice was to use the fiscal leeway (from higher growth and surprise RBI dividend) to bring down the deficit to 4.6% of gross domestic product (GDP) and second was to keep it at 5.1% of GDP as communicated in the interim budget and use the fiscal leeway to spend on parts of the economy that need support.

Lifting the deficit beyond 5.1% is not a choice as India has the highest debt ratio among similarly rated peers. And the cost of fiscal profligacy can outweigh the transitory benefits that come from higher spending.