Food inflation due to government policy delays

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Sushma Ramachandran | 25 Jan, 2010
Even as food prices continue to rise inexorably at over 16 percent, the government has finally taken steps to curb the spiralling price inflation that has been hurting all sections of society, especially the poorest of the poor. And Agriculture Minister Sharad Pawar is in the eye of a storm over remarks that milk prices may go up as shortages are being reported by several states.

He has also announced measures to reduce prices of basic food articles like wheat, rice and sugar. He has even assured that prices will begin to climb down in 10 days. The question is why the government took so long to take these measures when it had been clear for the last few weeks that food prices were rising uncontrollably?

As expected, the issue has assumed much wider political ramifications with Pawar having criticised the Uttar Pradesh government for its curbs on processing of imported sugar and Chief Minister Mayawati, in turn, retaliating against the centre for what she described as misguided economic policies.

But the war of words will not help the common man who is having to cope with double-digit inflation for essential food items. As a result of the soaring prices at the wholesale level on which the main inflation index is based, the prices at the retail level have risen exponentially.

Sugar, for instance, is available at Rs.50 per kg to consumers in the open market, while pulses continue to rule at around Rs.60-Rs.80 per kg. Wheat and rice prices, too, are much higher than ever before, creating acute hardship for the economically weaker sections of society. Prices of vegetables like potatoes have risen nearly 50 percent over the past year. Accordingly, the consumer price index has reflected the reality on the ground by recording inflation at around 13 percent, against 7.3 percent in the wholesale price index for December.

The agriculture minister has now announced that three millon tonnes of wheat and rice will be released in the open market to ensure that easier availability brings down prices. But this is a measure that could have been taken weeks ago. It appears as if there has been a collective paralysis on the part of the United Progressive Alliance (UPA) government on curbing price rise.

Planning Commission Deputy Chairman Montek Singh Ahluwalia said earlier this month that food inflation would decline this year as the impact of drought would gradually recede -- a statement indicating that nothing was needed to be done on the supply side for bringing down food prices.

In sharp contrast, Finance Minister Pranab Mukherjee has now stressed that supply side measures would be needed to bring down food prices. This includes measures to improve grain distribution by ensuring that state governments lift their full allocation of wheat and rice meant for the public distribution system.

Data released by the finance ministry indicates that states have not been lifting their full quotas from the centre. It is clear, therefore, that states also need to assume responsibility for the issue of foodgrains distribution rather than merely accusing the central government.

In the case of sugar, the role of the states in pushing up prices has been highlighted as stocks of imported raw sugar are languishing at the ports since the Uttar Pradesh government is not allowing processing by sugar mills in the state. According to the chief minister, this is meant to protect cane farmers by ensuring that only domestic production is processed at the mills.

The restrictions has, however, created severe hardship for consumers since sugar prices have shot up to astronomical levels. Besides, the decision to allow duty free import of sugar will not help unless states simultaneously reduce their own taxation on this basic food article.

But the good news is that wheat and rice stocks are more than adequate to meet demand. Wheat stocks are expected to reach 14.7 million tonnes on April 1, 2010, while that of rice are expected to be around 11.5 million tonnes on Oct 1, 2010. This is higher than the targets of four million tonnes and 7.2 million tonnes, respectively. The spectre of rice imports has thus receded for the time being.

Food inflation could ultimately have a cascading effect on manufacturing, though factory output grew at a robust 11.7 percent in November. The Reserve Bank of India is reported to have taken note of the high growth in the industrial sector and is likely to begin the withdrawal of fiscal stimulus measures quite soon. It is clear, however, that food prices will have to be tackled by supply side measures rather than monetary policy.

Even as the government has begun to tackle high food inflation, the issue of raising fuel prices has arisen yet again. With global crude prices ruling at $80 per barrel, the domestic oil companies are once again incurring losses, having to sell fuel at below cost -- called under-recoveries. A decision on this issue seems to have been deferred for the time being, but it may have to be reviewed again in the coming weeks. This will be one more factor creating inflationary pressures on the economy.

For the time being, the steps being taken to improve supplies of wheat and rice while extending duty-free status to sugar imports may ease the situation to some extent. One can only hope prices start to ease in 10 days as has been projected by Pawar. Otherwise, it will continue to be a long and hard winter for the common man in India .

* Sushma Ramachandran is an economic and corporate analyst. She can be reached at sushma.ramachandran@gmail.com
* The views expressed by the author in this feature are entirely his/her own and do not necessarily reflect the views of SME Times.