Soaring food prices-led inflation is creating worries for India’s policy makers.
The consumer in India is caught at Winter 65. Don’t get confused! It is the prices of onions, petrol and beer that have all increased beyond Rs 65. Perhaps for the first time in the post-independence era, the prices of onion, a basic necessity, have moved on a par with the prices of petrol and beer. The rising onion prices have forced policy makers and economists focus on what has led to this sudden spike in what is an essential part of daily vegetable basket of every Indian family. They’ve discovered that onion traders were hoarding up on supplies as unseasonal rains in October destroyed crops in Maharashtra, the biggest onion producing state. This resulted in a severe drop in yield per acre of land and this, in turn, prompted onion farmers to treble the prices at which they sell to the traders.
Reports indicate that the country’s economic growth will be relatively strong in India this year, around 8.1% growth. But the worry is that growing inflation is being driven by supply bottlenecks and rising incomes. Expressing concerns over high inflation, Reserve Bank of India (RBI) Deputy Governor Dr KC Chakraborty said that “Inflation is a difficult situation but manageable.” Owing to the rising food prices, the wholesale price index — India’s inflation indicator —rose to 8.43% in December’10 as against 7.48% over the previous month. Food inflation remains at high levels, with an annual increase of 16.91% in the week ended-January 1, 2011. Economists forecast that the inflation at the end of this financial year is estimated to be at 7%, revised upward from 6.5% earlier.
Another view is that the rising inflation has more to do with credit growth in the economy and less with food prices. Nevertheless, the economy faces a choice between diverting government money to subsidize fuel prices or letting inflation continue to rise. India is a heavy importer of fuel and is particularly vulnerable to the rise in oil prices. Sanjaya Panth, a representative for the IMF’s Asia and Pacific department in India, praised the nation’s efforts to free fuel prices by cutting subsidies. He says the government is diverting the savings to more productive areas such as infrastructure investment. However, he warns that lower subsidies will boost inflation and that interest rates will have to rise.
Measures to tame food inflation
Industry body, Confederation of Indian Industry (CII) said that India and its neighboring countries should sign a special accord for import and export of perishables to tide over the demand-supply mismatch. It has prescribed a 10-point recommendation to tackle inflation. These include –
1. In Short Term, Lower import duty, especially on fruit & vegetables and allow imports: Looking at the rising prices of fruit and vegetables, the Government should react fast on lowering the existing tariffs (hovering around 30% to 50%) and allow import of these commodities.
2. State Governments should take stern enforcement measures to curb hoarding and speculations.
3. The Government should invite and Incentivise private sector (both domestic and foreign), cooperatives and NGOs to come up with business models that directly link the growers with processors and retailers.
4. In Medium to Long Term, all the fruits, vegetables and other perishables including fisheries having very short shelf-life should be fully exempted from the provisions of the APMC Act. Processors and organized retailers should be incentivised to procure directly from the farmer groups (growers’ companies or cooperatives) for building infrastructure in rural areas for aggregating the fresh produce, cleaning it, grading, packaging, and storing in cold storages before bringing it for retail distribution. This will create not only employment in rural areas but also build much needed infrastructure.
5. The Centre should also encourage the States to help build this infrastructure, especially cold storages, to save on wastages which will boost supply side and help in price moderation.
6. The Government should move towards a unified national market and allow free movement of fresh produce across the country without any taxes whatsoever.
7. Most importantly, it is time to usher in market reforms by compressing the value chain of Agri-commodities. The model of creating a marketing platform at the village level needs to be promoted where the buyers will come to the producer groups directly rather than farmers going outside to sell their produce.
8. Investments in organized retail (both domestic can foreign) to shore up the entire supply chain and ensure good prices to farmers as well as consumers.
9. Strong and urgent focus is needed to enhance farm productivity by way of adequate inputs usage and by extension for enhancement of the supply side to meet the growing demand on a sustainable basis.
10. .A special agreement should be signed between India and the neighboring countries - for import – export of perishables. This will be a confidence building measure and will ease demand supply challenges of similar commodities between India and the neighboring countries.
Source: CII
Monthly trends in Wholesale price index- monthly average (% change)
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