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LATEST NEWS UPDATES | The real meaning of food inflation by KP Prabhakaran Nair

The real meaning of food inflation by KP Prabhakaran Nair

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published Published on Jan 4, 2011   modified Modified on Jan 4, 2011

There is a suggestion circulating in the corridors of our apex monetary regulatory authority, the Reserve Bank of India, that food inflation is beginning to look more ‘structural’ than ‘seasonal’, and it can only be tackled by addressing the supply side. We need to address both demand and supply sides simultaneously to tackle food inflation. While we must be happy that more and more poor eat fruits and cook vegetables for their meal, we must examine why the prices of these commodities have shot up and are staying that high.

The Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), the massive and admittedly the biggest social security network ever conceived in the world, enables millions of poor Indians to garner extra cash, and many want to eat more fruits and vegetables, quite understandably. The supply cannot cope with the demand pull. Hence the prices of vegetables and fruits have skyrocketed. The government had not prepared itself thoroughly to meet this contingency before implementing the scheme, with the result India saw more cash chasing limited supply of these items.

The real problem of food inflation is not structural, as is made out by the economic mandarins in New Delhi, but seasonal combined with an underlying rising trend, the latter influenced by the explosion of money supply. This is where the RBI has to act with sternness. During the last 25 years the excess money supply over demand was around Rs 30 lakh-crore, i.e. each year the economy had so much money circulating — about Rs 1.2 lakh-crore each year. When this huge liquidity is circulating in the economy and the country has not prepared itself to meet this high liquidity by a huge increase in production of agricultural goods, food inflation is bound to result.

To talk about the spillover of food inflation, the RBI should come out with its interpretation of input-output tables for India and the linkages between agriculture and industry, even though they may not be up-to-date. Agriculture depends on industry for energy, chemical fertilisers, pesticides, implements. On the other hand, industry depends on agriculture for its raw materials, most important of which is cotton for textile industry, jute, sugarcane for its sugar industry, fruits, and cereals, in particular, grapes and barley for the beverage industry, specially for beer and wine manufacture.

The key economic decisions of the RBI have almost always been industry-centric. It is high time that a departure is made in this mindset and the bank gives its due importance to agriculture. There are developed sectors like gems, jewellery, leather, pharmaceutical and petroleum industries that do not depend on agriculture for inputs.

Neglect of agriculture will severely impact India’s industrial progress. The distinction between the busy and slack seasons in the economy was the basis for formulation of half-yearly monetary policies by the RBI many years ago. It took quite some time for it to recognise this fact, although its own seasonal economic indices showed how the differences between the two seasons were getting blurred. First it stopped referring to the seasons and then started formulating quarterly policies. Now, it has mid-quarterly policies.

The economy is busy throughout the year. We have rice in the kharif season and wheat in the rabi season and both play an equally important role in tempering food inflation. If at all seasonality exists, it is in the export of agricultural products that rise in the second half of each year.

Our planners and politicians, keep talking about the Gross Domestic Product (GDP). But when we compare the inflation rate against GDP, we have a very disturbing scenario emerging. We cannot talk of GDP without talking of inflation. Too much money is chasing too few goods in the country. The economy is flush with cash, but production, especially agricultural, is not keeping pace. Unless the inflation rate is brought down significantly, sustaining the growth momentum is not going to be easy. The high growth rates of 2004-07 were accompanied by low inflation and interest rates. By contrast, though the growth rate has returned to the “pre-economic crisis trajectory” of 2008-09, the prevailing upward pressure on inflation and interest rates could be very damaging to the economy.

Another worrying factor is that the budget deficit is gradually escalating. Though the deficit figure is expected to come down to some extent this year, it will not be on account of any systemic improvement but because of the ‘one time windfall’ from the auction of the 3G Spectrum. Taking into account the off-budget items and the deficits in state budgets, the combined fiscal deficit of the Centre and the states this year could be as high as 10 per cent of the GDP, nearly thrice the level of the pre-economic crisis period.

Agriculture has clocked a 4.4 per cent growth during the current quarter — the fastest growth in 11 quarters. This is a result of abundant rains in the dry tracts, not because of any technical breakthrough. This rate of growth is unlikely to be sustained given the long-term stagnation in agricultural productivity, and a lack of any spectacular farm technology forthcoming.

A high inflation rate, rising input costs, a strengthening rupee and stagnant agriculture — is a very disturbing scenario. What implications can these developments have for the RBI? It should not give up its role in regulating aggregate demand even though it may not contribute to a reduction in the prices of onion or orange. It should concern itself with the general level of prices. That is where it should give up its ‘structural inflation’ mindset.

(The writer is an agricultural scientist)

Express Buzz, 3 January, 2011, http://expressbuzz.com/opinion/op-ed/the-real-meaning-of-food-inflation/236532.html

Tagged with: Inflation



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