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Resource centre on India's rural distress
 
 

Food inflation fanned by change in dietary habits: D Subbarao, Governor, RBI
-The Economic Times
 
Governor of the Reserve Bank of India, D Subbarao said on Tuesday that India's food inflation was fanned by change in dietary habits. Commenting on high inflation, Subbarao said that underlying drivers of inflation have changed. 

"India needs to address challenge of food inflation. Food inflation has substantially come down but over the last 3.5 years since 2008-2009, average food inflation has shot up higher than the past 6 decades," added Subbarao. 

Subbarao said that in 2002 and in 2004, there was deficient rainfall but not such high food inflation. "It is really what we need to understand if we need to address the challenge of food inflation." 

Subbarao listed five factors that were driving food prices. 

1. Shift in dietary habits towards protein foods. 
2. Pressure stemming from inclusive growth policies. 
3. Large increases in MSPs of food grains. 
4. Shocks from global food inflation. 
5. Financialisation of commodities. 

A very distinct feature of recent episode of food inflation has been the sustained pressure in protein rich items like pulses, milk, fish, meat and vegetables. 

"What you see there is the moving average of protein food inflation compared to primary food and compared to all commodities. What you will see is that starting 2000, protein food inflation has exceeded both headline and primary article inflation. We know from Engel's Law that as incomes go up, the proportion of food in total expenditure goes down and that is what this chart shows which is validation of Engel's Law," added Subbarao 

Subbarao said that that from 1987 up until 2010, the proportion of expenditure both in rural areas and urban areas on food as a proportion of total expenditure has come down. "But for an explanation of food inflation, we do not need Engel's Law but somewhat less known Bennett's Law which says that as incomes go up, people eat less of serials and eat more of protein and which is what we are seeing in India happening today," said Subbarao. Share of protein foods in total food expenditure has been increasing. 

"Protein food inflation was evident even earlier, but it has been much sharper in recent period reflecting among other things accelerated increase in nominal wages. It is possible, in fact agricultural economists will say that even in the pace of structural changes, food inflation is not inevitable, we need not have food inflation. But the reasons structural changes are driving food inflation in India is because there has not been adequate supply response," added Subbarao. 

The stubbornly high inflation has hurt the government's credibility and if not curbed in a couple of months, it would send a signal that the policymakers are clueless in controlling the menace, Planning Commission Deputy Chairman Montek Singh Ahluwalia said. 

Overall inflation has remained stubbornly high, near double digits, since January 2010. Headline inflation based on the wholesale price index was recorded at 9.73 percent in October. Food inflation was recorded at 10.63 percent for the week ended Nov 5, according to the latest official data. 

Top policymakers, including Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee had projected that inflation would come down to a comfortable level of around 6 percent by the end of this calender year. 

"We are taking care to remove the supply constraints and I do hope from the month of December, inflation pressure would be moderate," Finance Minister Pranab Mukherjee said at a meet through a video-conferencing.

The Reserve Bank of India has increased its key policy rates 13 times since the beginning of 2010 to curb the stubborn inflation, without much success so far.