Challenge of food inflation

The government’s concerns over high food prices are reflected in a number of recent policy announcements. Finance Minister Pranab Mukherjee, who heads the empowered group of ministers on drought, has reiterated that if need be the government will import commodities that are in short-supply. The ban on the export of certain essential items will continue. Although there are enough buffer stocks, the shortfall in kharif production might fuel food inflation. Urgent measures are needed to save the standing crops. Clearly, there is a sense of urgency in not only ensuring food availability but also in moderating inflationary expectations.

Already, food prices are ruling high, as reflected in various consumer price indices — the headline inflation, however, remains in negative territory due to statistical aberration. The appropriateness of taking the wholesale prices-based inflation index as the sole reference point for policy formulation has once again been called into question. From a monetary perspective, it is clear that the traditional policy measures to combat inflation such as varying the interest rates will not be wholly effective in India. Food items that are assigned heavy weightage in consumer price indices are susceptible to supply side shocks due to the monsoon vagaries. That has been amply demonstrated this time.

High food prices have also weighed with the government in determining the minimum support prices (MSP) for paddy and a number of other crops. The MSP for paddy has been hiked by Rs.100 a quintal. However, the new rate at Rs.950 a quintal for “common paddy” — and at Rs.980 for finer varieties — is, in effect, only Rs.50 more than what was paid in 2008-09 if the bonus of Rs.50 is taken into reckoning. This is in contrast to the hefty Rs.125-155 increase sanctioned during the previous two seasons.

The MSPs for other crops that are in short supply, except for a few varieties of cereals, have been frozen. The government’s efforts at balancing the interests of the consumers served through the public distribution system with those of the producers will be particularly challenging this season. A shortfall of 10 million tonnes is expected in the kharif rice output.

Since market prices are bound to be higher than the floor set by the MSP, farmers are more likely to sell their produce to private trade than to the public distribution system. Adding to the government’s woes, the States that contributed most to its stockpile last year — Punjab, Andhra Pradesh, Uttar Pradesh and Chhattisgarh — have had significantly deficient rainfall so far.

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