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When inflation starts to hurt

When inflation starts to hurt
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First Published: Tue, Jan 04 2011. 08 23 PM IST

Graphic: Ahmed Raza Khan/Mint
Graphic: Ahmed Raza Khan/Mint
Updated: Tue, Jan 04 2011. 08 23 PM IST
Food prices are rising again, but that is hardly surprising for people who have been accustomed to double-digit inflation for more than two consecutive years, as we have in India. Since March 2008, food inflation has remained in double digits, with no signs of slowing. The only change has been in the commodities responsible for it. These have varied from cereals to sugar and now to vegetables— onions in particular.
The only place food prices seem to be decreasing is in the mind of the government, which keeps claiming that food inflation will relax in next three-six months. It is a different matter that those three-six months have not appeared so far. Indeed, even a road-side tarot card reader might have done a better job predicting trends in food price inflation.
With every new story on food price inflation, new excuses are played out. The fact is that in almost all cases, it is the government that has either contributed to fuelling inflation— for example, by hoarding cereals— or has failed to read the early warning signals. As recently as last month, government food stocks were almost double that of the buffer requirements. This is expected to increase further with the new kharif arrivals, and with no feasible plans of offloading stocks that have been rotting for months. Even with vegetables, government action has been too little, too late. With the government clueless, speculators have had a free run on prices.
Graphic: Ahmed Raza Khan/Mint
The domestic constraints, however, are not the most worrying part. We are in a much better position internally than we have been in the last five-six years, thanks to our farmers who have done well in stepping up production for almost all major food products. Based on the latest data, our rabi production will hit a record, with wheat output expected to touch 82 million tonnes. There have been significant improvements in cotton and sugar production too. In both, we will be producing more than the domestic demand. The current inflation in vegetable prices is at best seasonal, and suitable action to contain speculative pressures should ease the situation.
But if we put aside the domestic bottlenecks, there is a greater danger waiting outside. International food prices have been increasing much faster than domestic prices.
More worryingly, global prices are increasing for almost all food groups, in some cases even reaching the peaks of 2008. This increase, which started in July, led to overall food prices increasing by 26% by November. Sugar prices increased by 67%, oils by 44% and cereals by 49%. There is no sign of these cooling, with international food prices expected to continue their upward movement even this year.
With severe winter and cold waves in the northern hemisphere, including the US, and massive floods in Australia which have damaged an area larger than Germany and France combined, there is a real possibility of wheat shortage in international markets. The US is the largest producer of wheat, and Australia the fourth largest.
Already, future prices of wheat in international commodity exchanges are at their highest since August. Similar upward pressure is expected on sugar as well as other cereals.
This is further compounded by the increase in oil prices over the last five months. Crude is trading at $92 a barrel and is expected to cross $100 a barrel very soon. This would be the highest in the last 26 months, and there is a clear danger crude prices may continue to move upwards, threatening to touch peaks last seen in 2008.
The surge in primary commodities such as oil and food is similar to the one seen in 2008. An estimated two billion people were affected then, and severe food riots were seen in as many as 26 countries including Bangladesh.
What about India? Although we are largely insulated from global food prices (though not from crude oil prices), India did see the transmission of international trends, as domestic prices increased by more than 20%.
With a ban on future trading already in place for a majority of cereals (it has been relaxed for sugar), we may be able to contain some of the transmission, provided the government takes adequate steps now.
More worrying is the increase in international crude prices, which will put upward pressure on domestic prices. That may hurt both ways: first, by directly increasing the cost of cultivation, since prices of fertiliser and diesel (a principal element in irrigation) are linked to international crude prices; and second, by increasing transportation as well as other indirect costs of processing.
Despite our production advantages and our farmers’ ability to sustain cost increases, we may see food price inflation becoming an entrenched problem. If this is so, it will not be due to international price surges as much as our own inability to handle inflation. Given the government’s track record in containing prices, this is all the more likely. Isn’t it high time we started worrying about inflation?
Himanshu is assistant professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi
Comments are welcome at theirview@livemint.com
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First Published: Tue, Jan 04 2011. 08 23 PM IST