N K Singh

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 Inflation is now an Asian worry. The annual report of the Asian Development Bank, entitled Asian Development Outlook 2008, points out that while growth in Asia will be moderate this year, inflation management will be the single biggest challenge. Inflation will be in double digits for Central Asia and remain worrisome for the People’s Republic of China, notwithstanding tighter monetary policy, higher reserve requirements in banks and an attempt to deflect growth away from exports and investments. The report observes that “the risk of an inflation spiral in Asia is palpable and warrants close attention. Indeed, actual inflation rates disguise the extent of underlining inflationary pressures due to the presence of subsidies, administrative price controls and cuts in excise duties”. This is more true in India than anywhere else.

In low-income countries, inflation hurts every segment of society, but its incidence is the worst among poorer segments, both urban and rural. Within this category, the impact of food inflation is the harshest. While those who are better off adjust to keep the food consumption unchanged, the poor do not have this flexibility as the bulk of their income is anyway devoted to food consumption. In other words, the poor have to reduce food consumption, suffer nutritional deficiencies and other disabilities.

For India, the Consumer Price Index for the week ending March 29 registered a point-to-point inflation of 7.41 per cent. This masks the real impact because primary articles have only a 22 per cent weightage in the Wholesale Price Index (WPI), while manufactured articles have a 63.7 per cent weightage. The prices of fruits, vegetables, edible oil, pulses and cereals have risen far more significantly. So food inflation is considerably higher than what is reflected in the WPI and a cause of serious concern.

Our present food scenario represents a combination of at least eight factors.

First, systemic failure of market intelligence. It was evident for quite some time that the international food situation was deteriorating. Unprecedented droughts in Australia, which run down the international food inventory levels of rice and wheat, and diversion of farmlands for production of bio-diesel and ethanol resulted in a steep rise of prices for wheat and rice. These trends should have been spotted in time and imports effected at far lower prices than the prevailing trends. Currently, while international prices are at a record high, the availability has shrunk. This, when the rising demand pressures from emerging markets like India and China are unable to evoke short-term supply responses. The explanation for not effecting imports during the earlier period of price cycle, on the grounds that it could adversely affect farmer psychology when procurement had commenced, is not convincing. While the foodgrain stocks held by the FCI/state agencies have reduced sharply, we continued to export rice and wheat unwatchful of the global trends. Food intelligence is central to any food management strategy.

Second, ad hoc reactions like cutting import duty on a range of products and imposing export bans can at best yield temporary benefits. They are no substitutes for long-term systemic action to improve farm production and productivity in cereals and other increasingly preferred items like fruits, vegetables, dairy and meat products. Given the scorching pace of our GDP growth, the per capita income has risen sharply. At lower income levels, this rising consumption has created demand pressures on cereals, while at mid-income levels a shift in consumption patterns for both animal and vegetable proteins, legumes and pulses has led to new demands. From being a food surplus country, India has become a food deficient economy.

Third, strengthening the Public Distribution System with enhanced allocations based on actual household data for BPL families, particularly in poor populous states, is inescapable. Expecting state governments to enforce the provisions of the Essential Commodities Act, which are well known, is no doubt necessary. However, this should not result in further reinforcing the psychology of shortage, generating added pressures on somewhat inelastic supplies.

Fourth, a combination of both monetary and fiscal policies is inevitable. This will hurt investment and growth, an inevitable consequence of managing inflationary trends.

Fifth, even existing technology can enable a doubling of productivity in cereals and allied products. In some regions like Bihar, productivity can even be tripled, given the present abysmally low levels.

Sixth, minimising food wastage and prolonging shelf-life of fruits and vegetables have immediate benefits. Improving rural infrastructure, market linkages, dissemination of information and improving the economics of cold chains can greatly improve both farm incomes and evoke near supply term responses.

Seventh, given recessionary trends in the US and moderation of growth elsewhere, it is likely that the demand for non-food articles may cool off in the latter half of the year.

Eighth, our increased global inter-dependence and similar actions elsewhere feed the psychology of shortages. Rising prices have consequences beyond food security. It affects the prices of other products, particularly building materials, which further affects the cost and viability of public and private outlays.

India is known for its low threshold of inflation tolerance. We have failed to spot, react and respond in time. This could prove costly. Managing inflation and reversing inflationary expectations is never easy.