The concept of Inflation and Price Control in India is addressed through two distinct, yet related, policy mechanisms: monetary policy and direct legislative action.
Inflation Targeting is a monetary policy concept where the Reserve Bank of India (RBI), the central bank, is mandated to maintain price stability. This framework was formally adopted through the Monetary Policy Framework Agreement (MPFA) in February 2015 and given statutory backing by amending the Reserve Bank of India Act, 1934 in 2016. The problem it solved was the lack of a clear, primary objective for monetary policy, which previously followed a multiple-indicator approach. The mechanism works by establishing a medium-term target for Consumer Price Index (CPI) inflation at 4% with a tolerance band of +/- 2% (i.e., 2% to 6%). The Monetary Policy Committee (MPC), established under Section 45Z of the RBI Act, is the institution responsible for setting the policy interest rate (repo rate) to achieve this target. The inflation target is reviewed and set by the Central Government in consultation with the RBI every five years, with the first target set in August 2016.
Price Control is a legislative act primarily implemented through the Essential Commodities Act (ECA), 1955, which gives the government sweeping powers to regulate the production, supply, distribution, and pricing of goods deemed "essential". The ECA was enacted on April 1, 1955, to combat food scarcity, hoarding, and artificial price inflation in post-independence India. Section 3 of the ECA grants the Central Government the authority to issue control orders to ensure equitable distribution and availability at fair prices. A significant recent change was the Essential Commodities (Amendment) Act, 2020, which inserted Section 3(1A), stipulating that the regulation of foodstuffs like cereals, pulses, and onions can only occur under "extraordinary circumstances" such as war, famine, or an extraordinary price rise. A related mechanism is the Drug Price Control Order (DPCO), issued under the ECA, which regulates the prices of essential medicines, with the latest being the DPCO, 2013, which brought all drugs on the National List of Essential Medicines (NLEM) under price control.