More than onion hike,pricey protein items are the problem

“Prices of protein items,specially milk,fish,eggs and meat that are not sensitive to monsoon,have been rising steadily. When this happens,and there is a trend,it carries a risk of spilling over to generalised inflation,” Subir Gokarn,Deputy Governor,Reserve Bank of India told The Indian Express.

The rising food prices — food inflation is estimated at 12.13 per cent for the week-ended December 11 — despite good agriculture growth in the first half of 2010-11,lends to people believing that this will feed into wage demand and producer prices,Gokarn said. In macro-economic theory,this is called the wage-price spiral. What this essentially means is that rising prices result in demand for higher wages. This,in turn,leads to higher production costs and further upward pressure on prices.

After remaining single-digit for four weeks,a sudden spurt in onion prices pushed food inflation into the double-digit plane. RBI does not sweat over rising onion prices because this results from a temporary supply constraint. “This (onion hike),however,exacerbates sentiments,” admits Gokarn. What he is really concerned about is the structural imbalance between demand and supply for many commodities. According to the RBI deputy governor,as households become more affluent,their protein intake rises. “But we have supply constraints on pulses and milk,the vegetarian sources of protein,” he said. This partly explains the price rise phenomenon of vegetarian protein items.

The RBI is comfortable when the overall inflation is about 4-4.5 per cent. In India,the inflation for November stood at 7.48 per cent,significantly higher than the government or the RBI’s comfort zones. “When it is over 4-4.5 per cent,we need to be watchful,” he said.

Though inflation is showing a declining trend — it was 8.48 per cent in October — excess liquidity in rest of the world may find its way into alternate assets and cause prices of other commodities to rise. “In India,there exists the possibility of a supply shock due to high energy prices,” Gokarn said. India depends on imports for almost 70 per cent of its oil needs.

The finance ministry estimates the economy to grow within a band of 8.5 per cent +/- 0.35 per cent in the current financial year. “A growth rate of 8.5 per cent plus is looking quite realistic. So,growth is not so much of a concern now. It seems to have settled in groove. The focus has to be on inflation that has remained persistently high,” he said.