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Should we start worrying about food inflation again?

Should we start worrying about food inflation again?
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First Published: Thu, Mar 15 2012. 09 02 PM IST

Updated: Thu, Mar 15 2012. 09 02 PM IST
A sharp drop in food prices is one of the reasons why wholesale price inflation has slowed. This is partly because of a high base effect and partly due to cooling of prices. Expectations are that this will continue further, making inflation a non-issue in 2012-13.
But this week’s release of the Wholesale Price Index (WPI) for February showed it accelerated 6.95% year-on-year, compared with 6.55% in January, while primary food articles gained 6.1%, compared with a 0.5% decline. Milk, eggs, meat and fish are some of the food products seeing an increase. Vegetable prices rose by just 1.5% in February compared with a year ago, but were up 8% over January.
On a month-on-month basis, food inflation rose by 0.5% in February compared with 0.3% in January. It is not alarming, and whether this is a trend or an aberration will become visible over the next few months. But it does inject an element of uncertainty into the belief that food inflation is a thing of the past.
India does not seem to be alone in this respect. The Food and Agriculture Organization (FAO) reported that the FAO Food Price Index in February was about 1% more than in January, with higher sugar, cereals and oil prices driving the increase. Oil prices should be of special concern to India, as edible oil prices closely track international prices, and we import oils to meet our domestic requirement. The FAO Oil Price Index is up by 2% over January, stating poor monthly production of palm oil and prospects of a tight demand-supply situation as reasons for the increase. Crude palm oil prices are up by 19% since the first week of February.
Apart from demand-supply conditions, global liquidity also plays a role in price movements, as there is a financial market in these commodities as well.
The Reserve Bank of India said in its mid-quarter policy review that inflation risks remain, which will influence when and by how much it will reduce benchmark interest rates. The risks it refers to include rising crude oil prices, growing fiscal deficit and rupee depreciation. But if food inflation rears up again in the coming fiscal, it will make the task of cutting interest rates very tough, not to mention the effect it will have on consumers and producers.
That’s where the budget can play a role. A drop in interest rates is what Indian businessmen are desperately seeking. If the budget squarely goes about the task of raising revenue, reining in expenditure and being prudent with subsidies, then the government’s plan for cutting the fiscal deficit will appear credible. Tighter fiscal policy may give the central bank the courage to lower interest rates, even if inflation regains speed.
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Also See | Hitting a trough (PDF)
PDF by Sandeep Bhatnagar/Mint
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First Published: Thu, Mar 15 2012. 09 02 PM IST