India Reels Under Food Inflation

Continuing its rise for the fourth week in succession, food inflation reached 17.97% in the week ending February 6 in India.

In the previous week, the index for food prices had stood at 17.94%. A let-up in food prices is not expected until another twothree months when the winter harvest comes in. Government of India’s chief statistician Pronab Sen sees overall inflation at 10% by March, up from 8.56% in January, on the back of a persistent rise in food and fuel index — which stands at 9.89% — along with an increase in manufacturing prices. Inflation in manufacturing rose to 6.55% from nearly 5% in December, indicating that food inflation was spilling over to the wider economy. RBI had estimated the wholesale price index to be at 8.5% by March-end, which has already been surpassed. Amid rising inflation, conflicting signals continued to flow from the government. Finance Minister Pranab Mukherjee pared down his optimism on growth and admitted food prices were a cause for worry but agriculture minister Sharad Pawar said food prices had started to ease and will dip further next month. Faced with rising food prices, the government in January dipped into grain stocks to ease supply pressures and extended duty-free sugar imports by nine months. The RBI is now expected to further tighten purse-strings in its April review.

Uproar over the rising prices of food also forced Lok Sabha Speaker Meira Kumar to adjourn the Lok Sabha for a day in February after a furious opposition demanded top priority to a discussion on the issue. The Union government explicitly admitted that the sharp rise in food prices was partly fuelled by its own programs and policies — especially the National Rural Employment Guarantee Act (NREGA) and the high procurement prices given to farmers. The admission came during president Pratibha Patil’s address to a joint session of parliament. Higher prices, she said, were “to some extent a reflection of the implementation of our schemes of inclusive growth involving payment of higher procurement prices to farmers and the impact of higher public spending on programs of rural development, which have raised incomes in rural areas”. A weak monsoon in 2009-10 did not help matters.

Economists have always maintained that higher rural demand spawned by NREGA spending had increased demand for food, thereby raising prices. The government is now clearly acknowledging this reality.

“In the longer term, our food security can be ensured only through sustained efforts at increasing agricultural productivity, combined with a comprehensive reform of the public distribution system and open market intervention,” Patil said. “My government is committed to bringing forth legislation to ensure food security.”

Rising prices have sparked oppositionbacked street protests and left the government little elbow room to push through financial reforms such as easing fuel price controls. But the ruling Congress party faces no risk of losing power any time soon.

The prime minister’s economic advisory council last week said surging food prices threatened to fan broader inflation and endanger the economic recovery. Signs of divergence in views between the government and the Reserve Bank of India over the best policy balance have emerged, with the bank increasingly concerned about inflation while the government insists the policy focus must remain on economic recovery.

Food prices have become a major talking point for the media. Under mounting pressure, the Government has unveiled some short-term measures to curb prices, which is not a permanent solution. The price rise is variously blamed by different government representatives on last year’s drought, on “cost push” and on “dysfunction in distribution.” The Planning Commission Deputy Chairman has made public his belief that policy changes to make credit dearer are not a remedy. Imports without a government subsidy are also not possible as prices internationally are higher than in India. Action against hoarding and profiteering must be taken by state governments, says the Agriculture Minister, only to be roundly rebuffed and pointed out his errors of omission and commission.

In any discussion of food price rise, it is not long before one hears the word ‘drought’ - last year’s drought is assumed naturally to be the main reason behind the price rise. The facts, however, say otherwise. The possibility of a drought became apparent barely five months back (July 2009) and its effects - a below average crop of paddy, pulses, potatoes (Kharif crop) and sugar - would only begin to be felt with lower arrivals in the market from October onwards. Last year’s drought could account for the price rise over the last two months; prices however have been on the rise since the beginning of 2008.

Fuel prices rose sharply during 2008 but were back to their 2007 year-end levels by the end of 2008. The wholesale price index rose by only 6 per cent during 2008. The Government and its economists never came out with reasons behind this inflation. The likely explanation is that prices went up due to hoarding following the extraordinary increase in the international market price of rice in 2008, with the expectation that a killing would be made in exports. International rice prices more than doubled between Jan and May 2008 before settling down at higher than January levels towards the end of 2008. About 10 million tones of rice were exported from India in 2007 and 2008 before the government banned exports in April, 2008. After coming down marginally in the middle of 2009, prices have again gone up on the “inflationary expectation” arising from last year’s bad monsoon.