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Resource centre on India's rural distress
 
 

‘Rural wages scheme, Food Security Bill can stoke inflation’
-The Indian Express
 
Reserve Bank of India Governor D Subbarao on Tuesday cautioned that policies — the significant increase in rural wages triggered by the MGNREGS and inflationary implications of the proposed Food Security Bill — aimed at inclusive growth can stoke inflationary pressures at any rate in the short-term.

“The need for making growth inclusive is incontestable, but it is important to recognise that policies aimed at inclusion can stoke inflationary pressures, at any rate in the short-term. I could mention two examples here: first, the significant increase in rural wages triggered by the MGNREGS, and second, inflationary implications of the proposed Food Security Bill,” Subbarao said while addressing the 25th Annual Conference of the Indian Society of Agricultural Marketing in Hyderabad.

The Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), guaranteeing at least 100 days of wage employment to rural labour, in implementation since February 2006, has pushed up rural wages, in line with the expected outcomes of the scheme. “Consistent with the characteristic of a low income country, increase in wages in India has quickly translated to increase in per capita expenditure. The MGNREGS has evidently set the floor for the rural wage level, making wage push inflation more visible and prominent. Admittedly, increase in wages need not be inflationary provided it reflects higher productivity, but that is not currently the case,” he said.

The National Food Security Bill, 2011, is another potential source of pressure on inflation, and its inflationary impact will depend on the extent to which it will raise demand for food grains relative to the normal increase in supply. Estimates suggest that 68 per cent of the country’s 1.2 billion population will get a legal entitlement for food grains after the Bill is enacted, significantly raising the annual grain procurement demand even as the available marketed surplus would not increase correspondingly. “This will create demand pressures, which will inevitably spillover to market prices of food grains. Furthermore, the higher food subsidy burden on the budget will raise the fiscal deficit, exacerbating macro level inflationary pressures,” Subbarao said.

He said the “direct role of monetary policy in combating food price pressures is limited, but in the face of sustained high food inflation, monetary action may still be warranted to anchor inflation expectations”.

“A lasting solution to food price pressures lies in a supply response that raises agricultural production and productivity, improves supply chain management and sets right incentive framework for both producers and consumers. The outlook on food inflation in short- to medium-term will be determined by speed and quality of such a supply response by the government,” he said.

He said persistent and elevated food inflation over the last few years has emerged as a major policy concern, especially as it can potentially threaten our collective aspiration for a ‘higher, inclusive and sustainable’ growth. “Intriguingly, we are experiencing high food inflation in the face of record production of food grains, robust buffer stocks and growing resilience of agriculture to monsoon uncertainties. Evidently, dynamics of food inflation have changed significantly, and understanding them is obviously important for a policy response,” he said.

Subbarao said factors that are “driving food inflation: shift in dietary habits towards protein foods; pressure stemming from inclusive growth policies; large increases in the minimum support prices of food grains; shocks from global food inflation; and financialisation of commodities.”