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Food price surge may spur govt into more action

Food price surge may spur govt into more action
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First Published: Fri, Aug 07 2009. 12 38 AM IST

Out of reach: The cost of pulses has doubled in the country in recent months. High food prices have felled Indian governments in the past. Ramesh Pathania / Mint
Out of reach: The cost of pulses has doubled in the country in recent months. High food prices have felled Indian governments in the past. Ramesh Pathania / Mint
Updated: Fri, Aug 07 2009. 12 38 AM IST
Mumbai: India’s main inflation measure has shown prices falling from a year-ago levels for eight straight weeks, but try telling that to Shobha Uttam Vadivale, a 56-year-old housewife shopping for vegetables in central Mumbai.
“The cost of my food basket has gone up twice in the last two-three months. What used to cost Rs35 a kilo two months back is now Rs60 a kilo,” she said as she bought brinjal and cauliflower at a market in the Dadar neighbourhood.
Out of reach: The cost of pulses has doubled in the country in recent months. High food prices have felled Indian governments in the past. Ramesh Pathania / Mint
Wholesale prices fell for an eighth week, declining 1.58% in the week to 25 July from a year earlier after falling 1.54% in the previous week, the government said on Thursday.
The surging price of food in India, even as other prices are flat or falling, is unlikely to push the central bank to raise interest rates in the near term as it looks to nurture growth and accommodate a record $90 billion (Rs4.28 trillion) government borrowing programme.
But it is likely to spur action from a government worried that a weak monsoon will hamper growth just as the economy tries to pull out of the global downturn.
Since the rise in food prices in India is largely a factor of supply constraints, such as poor infrastructure, the vagaries of the annual monsoon, and this year the driest June in nearly eight decades, tighter monetary policy would do little to help.
“Hiking interest rates is not going to do anything for the price of rice,” said Macquarie economist Rajeev Malik.
Indeed, analysts don’t expect rates to start rising until January-March 2010, when a recovery in the economy will revive inflation pressures more broadly.
Instead, the government is likely to take further measures to ease food price pressure. It has already limited exports of wheat, wheat products and rice this year to cap domestic prices.
Its first move is often to cut import duties, which it did on Monday when it extended tax-free sugar imports, and the next step is likely to be further trade controls, such as crackdowns on grain exports, economists say.
Last year, India temporarily banned futures trading in commodities, including wheat, rice, vegetable oils and potatoes. If prices rise further, pressure from politicians is likely to grow for a renewed clampdown on futures trading.
Among fiscal moves, India can increase subsidies paid to farmers, but that would add pressure to the government deficit, already expected to be the biggest in 16 years this fiscal.
It won’t be the first time that the government has had to intervene to offset soaring food prices. Wheat imports in 2007-08 were earmarked for India’s poorest families, ensuring food supplies to the neediest, but market prices only came down after supplies picked up.
The monsoon is critical. A Reuters poll last month found below-normal rains could lower economic growth this year to 6%, while normal and well-distributed rains could promote growth of 6.5% or more. Gross domestic product rose 6.7% last year.
The cost of pulses, a staple legume, has doubled in the country in recent months. Sugar is up 40% since the start of the year and potatoes have doubled. High food prices have felled Indian governments in the past.
Food accounts for 60% of most Indians’ disposable incomes, and with elections looming in some states, lawmakers are clamouring for government intervention.
For financial markets, food prices add to the difficulty of tracking inflation. Food makes up just 18% of the most-closely watched Wholesale Price Index (WPI), but 45-60% of the less-followed Consumer Price Index (CPI). While WPI has been falling on a year earlier for eight straight weeks, high food prices have driven up CPI between 8% and 11%.
For now, many hope the monsoon will improve and bring down food prices. That may mean little near-term relief for consumers.
“Rains are good now. If it continues like this for the next two-three months, prices will come down,” said a vegetable seller in Mumbai surnamed Hande. But for now, he said, “I can’t buy vegetables for my own family, it’s so expensive.”
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Bloomberg also contributed to this story.
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First Published: Fri, Aug 07 2009. 12 38 AM IST