Business Today

Crocodile tears

That food prices have spiralled out of control over the last 15 months shows inflation was not a priority for the UPA government. The onset of the New Year shook the government out of its stupor.

Puja Mehra        Print Edition: Feb 6, 2011

February 2010:We have taken, on the supply side, adequate measures, which will take some time to have a depressing impact on the rising prices of essential commodities
Finance Minister Pranab Mukherjee

April 2010: India's inflation rate may decline in two to three months
Deputy Chairman of the Planning Commission Montek Singh Ahluwalia

May 2010: We hope to get back to average inflation of about 5 per cent to 5.5 per cent by the end of 2010
Finance Secretary Ashok Chawla

June 2010: Reasonable rains this year will slow foodprice infl ation, which has remained above 15 per cent since November
Deputy Governor of the Reserve Bank of India Subir Gokarn

Independence Day:We are making every possible effort to tackle this problem [inflation]
Prime Minister Manmohan Singh

Last week of 2010: Food inflation hit a 12-month high of 18.32 per cent.

Action delayed is a call upon calamity. The United Progressive Alliance, or UPA, the Congress-led coalition at the Centre, would know. For almost a year and a half, the monster of inflation has been rearing its head, and various mandarins have been threatening to vanquish it. But the situation only worsened; prices of vegetables and fruit, which normally plunge in December, shot up so much that they contributed to 40 per cent of inflation.

It needn't have been so. Weather reports, estimates of the ministry of agriculture and common sense were screaming trouble a month earlier. "It bothers us [the Economic Advisory Council to the Prime Minister] that the government waited for so long to take corrective measures when we had raised an alarm on the basis of government data in November itself," says V.S. Vyas, Member of the Economic Advisory Council to Singh.

Kaushik Basu, Chief Economic Adviser to Finance Minister
Kaushik Basu, Chief Economic Adviser to Finance Minister
Worse, R.P. Gupta, Director, National Horticultural Research and Development Foundation or NHRDF, Nashik says he can smell a rat. "A loss of 30 to 40 per cent of the kharif onion crop should not trigger such a spike in prices," says Gupta. NHRDF, the country's premier research institution for onions, is helping the government in managing the crisis. It has estimated this year's (June 2010-May 2011) output at 130 lakh tonnes against 121 lakh tonnes last year.

The onset of the New Year shook the government out of its stupor. Mukherjee wrote to chief ministers seeking a crackdown on hoarding. Pakistan sent in initial supplies but later banned exports of onions to India. By then much had been lost - including gains on the stock exchanges as the Sensex shed close to 5 per cent in early January. The drama was even more intense in the political theatre. "My state government's food subsidy bill has more than doubled from Rs 70 crore in 2007 to Rs 150 crore this year," Prem Kumar Dhumal, Chief Minister of Himachal Pradesh, told Business Today. The Opposition-ruled hill state is especially hit as it is a net consumer.

Vikram Bakshi, MD, McDonald's India
Vikram Bakshi, MD, McDonald's India
Business, too, is feeling the pinch. "Persistently high inflation has made it tough to keep our meals affordable," rues Vikram Bakshi, Managing Director, McDonald's India. The burger chain's costs are up 10 per cent. McDonald's fears that customers might reduce their intake of burgers and related foods; so it is holding its prices for now.

That's a choice small-time hawkers cannot make. In the bustling commercial district of Nariman Point in South Mumbai, for instance, prices of sandwiches are up 10-20 per cent and the ubiquitous bhel puri is now 25 per cent dearer than it was a few months ago.

The reason for these hikes is the sudden spike in vegetable prices. Prices of milk and eggs and meats have anyway been out of the comfort zone for over a year with supply lagging growing demand (see Proteins are Constant Sources of Inflation). "There seems to be euphoria over the 4.5 per cent growth that is forecast for agriculture in 2010-11; but this is only a spike that the government cannot rely on for long-term food security," says Vyas. The truth is per capita food availability grew only one per cent over the last decade, while per capita income surged 5.5 per cent.

It is no secret that the insufficient produce is managed inefficiently. "We haven't covered ourselves in glory over food management," Kaushik Basu, Chief Economic Advisor to the Finance Minister had admitted in December 2010 at the Delhi School of Economics. According to Basu, the Food Corporation of India has created an oligopoly since it releases food grains through auctions of mega blocks of 1,000 metric tonnes (economic theory says fewer bulk sellers in a market drive prices up).

With the government's failure to take timely action against shortages of different food articles at various points, inflation has by now been, as Vyas says, "built into the general economy threatening economic growth". According to a research report from Standard Chartered Bank, seasonally-adjusted annualised core inflation rose to 10 per cent in November, four months after it had bottomed out, led by higher mineral prices.

Input price pressures are evident in expected price increases in 2011 over current levels: 12.5 per cent in coking coal, 8 per cent in iron ore and 10 per cent for steel. Transport costs are up too. Petrol prices - partially decontrolled by the UPA government in mid-2010 - are inching up and railway freight rates were jacked up by four per cent recently. According to the Indian Foundation of Transport Research & Training, truck rentals rose between 24 per cent and 40 per cent on truck routes through 2010.

With the government failing to quell inflation, the onus has been on the Reserve Bank of India, or RBI. The apex bank has hiked key policy rates six times since March 2010 to fight high prices. But the dilemma for RBI Governor D. Subbarao is that food inflation has breached 18 per cent at a time when the rate of growth of industrial output has been fluctuating wildly; it plunged to 2.7 per cent in November, an 18-month low.

The efficacy of monetary policy actions in addressing food price inflation without hurting growth has now become a subject of debate. "The standard view on food inflation is that monetary policy is a blunt instrument except to the extent that persistent food inflation fuels inflationary expectations and can get generalised," Subbarao had told BT in an interview in November 2010 while expressing hope government would address supply issues.

"Fiscal year 2012 is also likely to be a tough year, with average WPI inflation expected to remain at a high level of 6.5 per cent. Inflation may once again surpass 7 per cent in the second half of fiscal 2012," according to the Stanchart report. The research arm of the bank has forecast policy rate hikes of more than 75 basis points in the next few quarters.

Higher interest rates may not augur well for GDP growth. Making the outlook even dimmer are two new sources of inflation. Despite rising global crude prices - they stood at a little over $90 a barrel at the time of writing - the government is holding diesel prices. This is something it cannot do endlessly or the mounting oil subsidies will wreck the fiscal deficit (projected at 5.5 per cent of GDP in the current fiscal.) More worryingly, global food price inflation is back. The Food Price Index of the Food and Agriculture Organisation of the United Nations hit a record high in December 2010.

Countries like China, Vietnam and Brazil are all facing double-digit food inflation. India is not a major importer of most food items, yet high global prices can affect price sentiment here as supply shocks cannot be ruled out.

On January 11 and 12 the Prime Minister held emergency meetings on inflation. The meetings yielded no concrete solutions but, mercifully, no more hollow assurances were proffered. But that is cold comfort for the common man as inflation continues to deepen the hole in his pocket week after week.

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