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LATEST NEWS UPDATES | Battling price rise

Battling price rise

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published Published on Dec 18, 2009   modified Modified on Dec 18, 2009

Curbing inflationary expectations is the priority

Food price inflation has been in double digits for almost a year. Officially this week it is clocking up 20 per cent, the highest in 11 years. Stories of inflation in pulses and vegetables have appeared repeatedly in newspapers all over the country. The minimum support price for wheat has more than doubled in the past three years. The sugarcane farmers invaded the roads of Delhi protesting against the Central government’s intervention to cap support prices paid to them. With so much evidence on food inflation, it was surprising that it hadn’t become a big issue with the Opposition. This has been attributed to a disunited Opposition bogged down with internal divisions, and being downbeat after the general elections. Two other explanations about the general political disinterest in food inflation was that there were no major elections due till 2011, and the high food prices were benefiting food producers, who constitute a significant rural vote bank. Both these explanations might have some validity. In fact, even rural landless workers may have benefited, since rural wages have gone up too, thanks partly to the national rural employment guarantee programme and also rising support prices for various crops. But it is the rural and urban middle class as well as the urban poor who are thoroughly singed with food inflation. The Opposition has finally woken up to the fact that the government needs to be held accountable, and some urgent remedy is needed. It is no use saying that this is “non-core” inflation, a term popularised by followers of Milton Friedman. The idea is non-core inflation tends to be volatile, and is mainly confined to food and fuel. Hence, the argument is that any monetary policy response can be hasty, or counterproductive. But food prices have risen in India for far too long. They will soon creep into wage inflation, if they haven’t already.

The biggest worry is that all this will feed into inflationary expectations, a setback we can ill afford. Indeed, nipping inflationary expectations in the bud will be winning half the battle against inflation. One major policy victory in the past 15 years is that Indian inflation expectations have been anchored around 5 per cent (or lower). All evidence points to conditions which presage policy tightening. Growth is stronger than expected, and liquidity continues to be ample. And foreign inflows will only increase. The only statistic which is a bit anaemic is the flow of bank credit, whose growth is only 10 per cent instead of 20 per cent in the same period last year. But expect the political and policy focus to be firmly on inflation from now on. The government must reflect on why there is such high food inflation when the country is sitting on record food stocks of 55 million tonnes? Why is it buckling under the demand to ban import of sugar from Brazil, when that country is anticipating a bumper crop, and Indian prices are soaring? Little less politics in such key economic decisions and greater sensitivity to public concern about food prices would help.


The Business Standard, 18 December, 2009, http://www.business-standard.com/india/news/battling-price-rise/379850/
 

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