Food price inflation is rearing its head again, but that may not be entirely bad news
Over the last two years, consumer price inflation had been vanquished, or so everyone thought, thanks to a combination of subdued demand, policy actions and a global bear market in commodities. But the steady rise in the Consumer Price Index over the last four months suggests that inflation risks remain. CPI inflation for November, at 5.41 per cent, is running well below the RBI’s target of 6 per cent (for January), but food prices are displaying unmistakable signs of flaring up again. The food component of CPI topped 6 per cent in November, with sub-components such as pulses (up 46 per cent year-on-year), edible oils (6.6 per cent) and vegetables (4 per cent) on a rising trend for five months now.
It is supply-side factors that have contributed to this resurgence in food prices. With the south-west monsoon ending the season 14 per cent below normal and wide swathes of north, west and central India hit by drought, the kharif crop on rice, pulses and oilseeds is likely to fall well short of last year’s levels. Optimistic pre-season forecasts suggested that these deficits would be made up in the upcoming rabi. But those hopes are now being dashed by high temperature during sowing and precarious reservoir storage. The policy response to these supply pressures has so far relied heavily on fire-fighting — the creation of buffer stock, higher imports, crackdowns on hoarders and stock-holding limits on crops. Measures to raise production through higher support prices or input subsidies have been rather late in coming. Structural issues such as the rain dependence of crops, and their relative economics, have gone largely unaddressed. Adding to the woes is the recent surge in global agri-commodities prices. With an unusually persistent El Nino, global estimates for wheat, palm oil, sugar and coffee are already being pruned, contributing to a sharp rise in the prices of these commodities in the last three months — something that deserves policy attention. But then, the upside risks to domestic inflation numbers do not originate from food prices alone. The Seventh Pay Commission’s proposed 23.6 per cent hike for government employees is expected to stimulate demand, but may equally prove inflationary.
Overall, these trends may prompt the RBI to stay further rate cuts immediately, even if Fed fears abate. But the silver lining is that a return to the days of moderate inflation may come as good news both to rural India and India Inc. Over the last couple of years, farmers have been reeling under the double whammy of low output and low realisations, hitting rural consumption. A recovery in crop prices may improve their lot. And after getting used to many high-inflation years of unquestioned pricing power, India Inc has been struggling to cope with a low-inflation environment too. A return to moderate inflation may help it register some topline growth.
(This article was published on December 15, 2015)
