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Resource centre on India's rural distress
 
 

Prices set for higher jumps by Gaurav Choudhury
The rise in food prices, with inflation at 9.06% in May, is more teary a problem than onions suggest. Macroeconomics managers, who safely steered the economy through the downturn, are perhaps grappling with the biggest economic crisis- persistently high food prices.

Rising food inflation driven by costlier fruits and protein-based items such as milk, egg, meat and fish is putting policy makers in a spot of bother. Prices are not under control despite a slew of fiscal and monetary measures. Food prices are also set to rise in the next few weeks following a possible hike in prices of diesel and LPG that will pinch household budgets even more.

As many as 15%, or one in every seven respondents to a HT-Gfk Mode survey, felt that price rise would be a major rallying point in next year's Assembly elections in Uttar Pradesh.

Core inflation-inflation other than food and fuel-continues to harden. Inflation of non-food articles has been in the range of 20-25% over the last many weeks. Average inflation in 2010-11 was 9.43%- the highest in 16 years. The government expects the average annual inflation for 2011-12 to be between 7.5% and 8% amid spiralling prices in a slew of vital commodities such as oil.

A lot will still depend on the monsoon. The Met department has forecast a normal monsoon, which is crucial for the summer-sown crop that accounts for more than half of the country's annual food output.

A strong farm sector output is critical in bringing down food inflation. “If the monsoon is favourable, food prices will come down over the next 2-3 months. Overall inflation rate will come down slowly by October end,” said chairman of the prime minister's economic advisory council C Rangarajan.

India's farm sector expanded at 6.6 % during 2010-11 and the government is pinning its hopes on strong agricultural output for the second straight year to sustain the growth momentum in the broader economy and keep food prices in check as well.

"The current monsoon season, global commodity prices and the magnitude and timing of the anticipated hike in diesel prices will continue to affect the inflation trajectory," said Rajeev Malik, senior economist at Singapore-based broking and research firm CLSA.

High consumption of high protein diet

Economists are working hard to ensure growth while keeping prices in check. Their latest worry is that food prices are revealing a new pattern reflecting the challenges of a growing economy. As the tens of millions of people shift to higher standards of living, the focus is changing from basic needs of nutrition such as rice and coarse grains to more aspirational products like protein rich eggs, meat and fish.

Recent price data shows that prices of protein-rich food items such as pulses, milk, eggs and fish have risen faster than overall food prices. At relatively low levels of per capita income, carbohydrate-rich diets based on cereals such as wheat and rice dominate protein-based diets.

In the last one year, prices of egg, meat and fish have risen by 18.75%, milk by 15.52% and fruits by 23.85%. Contrary to this, the price of rice has grown by 4.64% while wheat prices have risen by 1.52 % during the same period.

At relatively low levels of per capita income, carbohydrate-rich diets based on cereals such as wheat and rice dominate protein-based diets. This trend is showing signs of reversing with rising incomes. According to deputy governor of Reserve Bank of India (RBI) Subir Gokarn, "Rise in income has increased the share of proteins in peoples' diet. Rising affluence has also led to an increase in demand for proteins and nutrition."

Outlook: Not too bright

The RBI, in its mid-quarter review on June 16, had a strong message for everybody: Brace yourself for a spell of high inflation, at least in the near term.

"The headline numbers understate the pressures because fuel prices are yet to reflect global crude oil prices," the RBI had said in its mid-quarter review.

Domestically, inflation persists at uncomfortable levels. Indications are that oil companies will raise diesel prices in the next few weeks. High transport fuel prices will push up the cost of ferrying products across locations and knock up prices of most goods.

"Going forward, notwithstanding both signs of moderation in commodity prices and some deceleration in growth, domestic inflation risks remain high," the RBI said.

The increase in non-food manufactured goods (core) inflation is of particular concern as, apart from reflecting higher commodity prices, it also suggests more generalised inflationary pressures from rising wages and higher costs of service inputs . "Once the monsoon picture becomes clear, I expect decline in prices. We could see WPI (wholesale price inflation) at 6.5% by March-end," Rangarajan said.

Both the government and Reserve Bank of India (RBI) have acknowledged that underlying inflationary pressures have accentuated, even as risks to growth are emerging.