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A normal monsoon may not dampen food inflation

A normal monsoon may not dampen food inflation.

The good news is that the southwest monsoon was normal. The bad news: it may not have any impact on food inflation. "I don't expect food inflation to level off in the next two-three years," says Yoginder K. Alagh, agricultural economist and former minister, who is now on the board of Tata Chemicals. Food inflation is likely to be in double digits for the rest of the financial year, he adds. It was 9.13 per cent for the week ended September 17.

The Reserve Bank of India's tight monetary policy is expected to pull back overall inflation, as measured by the Wholesale Price Index, or WPI, by the end of this financial year. An October 4 report on India's economy by Standard Chartered Bank forecast inflation would drop to 8.40 per cent by March 2012 from 9.78 per cent at present.

But food inflation is expected to buck the overall trend as the dynamics of food consumption in India have changed significantly in the last decade. The monsoon and agricultural policy impact a dwindling portion of the country's dietary pattern. India's agricultural policy is largely designed to boost production of cereals. The monsoon's success also has a bearing on cereal production. This puts them both out of sync with the totality of items that affect food inflation. "The persistence of protein inflation has changed the inflation dynamics in the latter half of the 2000s," RBI's Executive Director Deepak Mohanty said recently.

The change in the dietary pattern in favour of protein such as eggs, meat and milk as well as vegetables at the expense of cereals such as wheat and rice has not been accompanied by a change in agricultural policy to enhance the supply of these commodities.

The double-digit food inflation between 2008 and 2010 is "demand-driven", says C.H. Hanumantha Rao, honorary professor at the Hyderabad-based Centre for Economic and Social Sciences. According to RBI, the demand comes from growth in incomes in both rural and urban India over the last five years. With a rise in incomes, the dietary pattern has shifted in favour of protein-based items, but supply response has been inadequate.

"You need to give a medium-term incentive and you are not giving a signal," says Alagh, pointing out that farmers do not have a stable pricing regime for nonfoodgrain produce. Rao says the nonfoodgrain output also tends to have a shorter shelf-life. A policy will have to factor in investment into back-end infrastructure such as rural roads and cold chains.

In the absence of adequate infrastructure and price incentives, farmers are unwilling to shift from cultivating grains to non-grain produce, says Alagh. This, in turn, keeps pushing up the price levels of non-grain produce as incomes rise. In the absence of agricultural policy being reoriented, "the trouble is, it is going to curtail underlying growth of the economy", says Alagh, referring to RBI's strategy of using interest rate hikes to anchor inflationary expectations.