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Resource centre on India's rural distress
 
 

Inflation down, but pinch is back as two indices tell different tales -Zia Haq
-Hindustan Times

Sharmilla Dar, a government schoolteacher in east Delhi, is irritated about a sudden surge in vegetable prices in the last week after they had cooled considerably since a year ago. "Why can't the government keep things affordable?" she asks.

For middle-class consumers, food inflation worries are creeping back in. The farm sector is hurting badly after a full year of unprecedented weather havocs - from a partial drought last summer to a turbulent winter of hailstorms and unseasonal rain that devastated ripening winter-sown crops and delayed harvests.

As a result, the country looks headed for its sharpest drop in output in five years with farm ministry projections showing foodgrain output will be trimmed by 3.2% to 257.07 million tonne, compared to the previous year's 265.57 million tonne. Pulses are expected to come down 6-8%.

In 2009-10, after India's worst drought in three decades, food output had fallen 7.5%, roiling prices. But the next two years had yielded bumper harvests.

"We have to be more careful in food management and the government has repeatedly said it is looking at food prices... It needs greater vigilance," Reserve Bank governor Raghuram Rajan told reporters.

A steady rise in household-end expenditures has been less noticeable, masked by falling wholesale prices. Households, such as Dar's, are already contending with "high personal expenditure inflation". This is because of a skewed divergence between wholesale and consumer prices.

The wholesale inflation rate fell for the fourth month in a row in February by 2.06% from a year earlier, after declining 0.39% in January. Contrast this with retail prices: the combined Consumer Price Index (CPI) edged up 5% in February from a year ago, just as it had in January and December.

"The fall in wholesale prices isn't helping consumers because it only captures 40% of the consumption basket," said NR Bhanumurthy, an economist at the National Institute of Public Finance and Policy.

To be sure, fuel expenses for the Dar family - they spend Rs 1,500 less on their monthly car fuel than a year ago - have come down, as captured by the CPI. "But a large segment of the CPI - such as processed food, leather goods and shampoos - that are demand-driven are pushing up retail prices," Bhanumurthy said.

Even at the wholesale level, food prices are spooking middle-income and poorer families. Vegetable prices dropped 6% in December to rise 15% in February. Onions rose 26% from a 1% fall in January. According to the Food and Agricultural Organization, in developing economies, a 10% rise in prices relatively hits the social welfare of both rural and urban households.

High retail prices could mean traders may not be passing on the full benefits of lower rates to consumers. "Food prices in both the CPI and WPI have largely moved in tandem, but inflation in clothing and footwear is significantly higher at retail level, indicating higher margins for sellers in these sectors. Overall, the moderation in WPI inflation reflects lower input cost pressures and higher profit margins for firms," said Sonal Varma, research analyst with brokerage firm Nomura.