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Resource centre on India's rural distress
 
 

Keep a watch on food inflation
-The Hindu

 The latest inflation readings based on the Wholesale Price Index and the Consumer Price Index are a cause for concern. While the annual gain in wholesale prices hit a 23-month high of 3.55 per cent in July, retail inflation quickened past the Centre’s new Monetary Policy Framework’s upper limit for tolerance to 6.07 per cent. Food costs — a key component in both indices — were the main culprit. Inflation in the food category of the CPI accelerated to 8 per cent, and in the case of the WPI surged to a 31-month high of 11.8 per cent. Some economists and the Reserve Bank of India have pointed to the forecast of normal rainfall this year, and the improvement in sowing on the back of the steady progress of the monsoon,as clear indicators that the outlook for supply can only improve going forward. It would, however, be worthwhile to consider some of the risks attached to these assumptions. For one, any beneficial monsoon impact onthe predominantly agrarian rural economy is bound to result in an uptick in rural wages, and by extension demand-side consumption pressures. According to a January 2016 International Monetary Fund working paper on ‘Understanding India’s Food Inflation: the Role of Demand and Supply Factors’, rising real rural incomes have had the largest impact on food inflation. This is particularly so as the large weight on food in household expenditure has meant that robust real income growth has tended to translate into substantial demand-side pressures that far outpace the supply-side gains. This stickiness of food costs can undermine the steady gains in the fight against price gains, a battle that must be fought since inflation ultimately ends up being a tax on the poor.

If the economy is to maintain the current growth impetus at a time when global demand is still fairly lacklustre, it will be essential that domestic consumption continues to be a key engine of economic momentum. It is precisely this consumption demand that will get a fillip from the increased salary and pension payouts that the government will make as part of the implementation of the Seventh Pay Commission’s recommendations and the One Rank One Pension plan. The Centre will have its task cut out in maintaining fiscal discipline if it is to ensure that increased expenditure from itsside doesn’t end up fanning inflation expectations at a time when monetary authorities are already grappling with the challenge of containing the food costs-led price gains. And with Prime Minister Narendra Modi having categorically backed the 4 per cent retail inflation target in his Independence Day speech this week, the politicalstakes to keep price gains under check couldn’t get higher.