New Delhi: Even as inflation slowed to half its August peak, the prices of staples such as cereals and pulses have surprisingly outpaced the most popular cost-of-living barometer, serving up a potential electoral issue for opposition parties ahead of the general election due to be held by May.
On 2 August, the wholesale price index, or WPI, the most commonly watched measure of inflation, peaked at 12.91% and progressively decelerated to 6.38% on 20 December. In the same period, the annual inflation rate for cereals accelerated from 6.53% to 9.50% and of pulses from 5.31% to 13.25%.
Also See The inflation paradox (Graphic)
The rise in food prices, despite bumper harvests over the last two years, comes at a time when the Congress party-led United Progressive Alliance, or UPA, is seeking to mitigate political fallout from a downturn in the economy. Economists are concerned the unexpected acceleration of food prices may spur politicians to promise more sops, such as rice at Rs2 per kilo, to gain electoral mileage, straining the fiscal outlook.
Significantly, consumer price indices, which accord greater weightage to items such as food articles over manufactured products, are yet to decelerate. According to the latest data, in November, the consumer price index for industrial workers measured inflation at 10.45%. And the consumer price index for agricultural labourers at 11.11% .
The unexpected spurt in food price inflation may impede the customary trend of consumer price indices following the WPI with a lag.
“The decline in inflation is not going to be a consolation for majority of Indians whose food basket consists of grains,” said Thomas Isaac, finance minister in Left-ruled Kerala..” The rising prices...is a paradox. This can be explained only by a failure of administrative machinery to ensure free and fair market movement. I should suspect hoarding is taking place still.”
International food prices declined sharply in the second half of 2008. The food index compiled by the Food and Agricultural Organisation dropped from a peak of 219 in June to 153 in November. India’s foodgrains production was 230.7 million tonnes (mt) in the fiscal year that ended on 31 March, 2008. That was 13mt more than the previous year’s output.
Some officials and economists attribute the food price inflation to expanding demand, spurred by schemes such as the National Rural Employment Guarantee Act, or NREGA, that assures a minimum 100 days of employment for each family and has been expanded nationwide after its selective launch in 2004. In 2008, a loan write-off benefited millions of farmers, leaving them with more money.
“The organized retail shops have also contributed to the increase in such prices,” said a Planning Commission official who didn’t want to be named.
A progressive increase in the minimum price guaranteed to farmers by the Centre too may have contributed to food price inflation, said Mahendra Dev, chairman of the Commission for Agricultural Costs and Prices which recommends the price. “This has led to higher floor levels,” he said.
Ahead of the kharif, or summer crop, procurement in 2008, the so-called minimum support price for rice was increased to Rs900 from Rs745 per quintal, while for wheat the it was raised to Rs1,000 from Rs850 per quintal.
Higher costs of agricultural inputs pushed up farm prices, said N.R. Bhanumurthy, associate professor at the Institute of Economic Growth. “This is clearly a pass-through that we are seeing,” he added. “However, with oil and commodity prices coming down, agricultural prices will also come down with a lag effect. I believe consumer price indices have now peaked and will come down from next month onwards.”
Former finance minister and Bharatiya Janata Party (BJP) member of Parliament Yash-want Sinha said inflation rem-ained a major issue despite the WPI’s decline.
“It is a real issue with people on the ground, whatever the figures might say, and they are feeling the pinch,” he said. “Then, there is also the question of availability. All these will definitely be issues in the elections.”
Congress party spokesman Veerappa Moily said the unexpected spurt in food prices would not affect the party’s electoral prospects in the next general election. “Black marketing and hoarding of food articles has to be stopped,” he said. “For this the state governments have to play a proactive role. The maximum that the Central government can do is pump in more food grains into the system.”
Moily also defended programmes promising cheap rice to the poor. “Such programmes can no longer be called populist since they target those at the bottom of the pyramid who need such schemes,” he said.
The recent success of the BJP in Chhattisgarh elections —staving off the so-called anti-incumbency factor—has been partly attributed to its promise of subsidized rice for the poor. In April last year, the Congress government in Andhra Pradesh started supplying rice at Rs2 per kg to the poor and in August the Biju Janata Dal government in Orissa followed.
Graphics by Ahmed Raza Khan / Mint
Liz Mathew also contributed to the story.