For a country finding it hard to fight inflationary fires, India is never short of bad news on this front. Data released on Tuesday showed the Consumer Price Index (CPI) rose by 10.8% year-on-year (y-o-y) in January. This is likely to pose complications in “normalization” of monetary policy the Union government so desperately desires.
As matters stand now, the gap between the Wholesale Price Index (WPI) and CPI has now widened to almost 3.9 percentage points. While it is true that the central bank can do little to curb high prices of food articles, the growing gap between WPI and CPI poses dilemmas that cannot be resolved easily. For example, given the nature of employment in India—the bulk of it is in the unorganized sector with daily wagers forming a huge proportion of workers—the demand for higher wages leading to further inflation via pricing power of companies is very real. The Reserve Bank of India (RBI) cannot ignore this even if the government has its eyes wide shut.
These problems are unlikely to go away any time soon. Last week, the second advance estimates of agricultural production for 2012-13 forecast a decline in foodgrain output by some 9 million tonnes over the previous year. While it is not unusual for these estimates to be revised later, as of now they should be taken as a warning sign. And if the government does go ahead and enact the National Food Security Bill (NFSB), the danger of an inflationary fire is real. While matters are nowhere near a “price scissors” type of situation (due to diverging manufactured goods and food prices), some level of caution is called for.
Few remedies are self-suggesting. For one, as suggested by the chairman of the commission for agricultural costs and prices, competent management of foodgrain stocks is key to ensuring that prices don’t get out of hand. This is, of course, easier said than done as the Food Corporation of India rarely moves stocks from food surplus states to deficient ones in an efficient manner. At the larger, policy level, postponing populist steps (such as implementation of NFSB) until a more opportune time and curbing government expenditure will help douse inflation to an extent.
What explains the high prices of food items in India: lower production or higher demand? Tell us at firstname.lastname@example.org