The inflation numbers for October are out and, as expected, are hardly surprising. Non-food manufactured products inflation has been tamed and is by and large tolerable, given India’s growth trajectory. In other words, monetary policy seems to be working.
The danger, as reflected in the numbers, lies elsewhere: in food prices, especially prices of protein-rich food items such as pulses, milk, eggs and fish. These, along with fuel prices, hit the common man directly. In October, for example, milk inflation stood at 21.7% (year-on-year or y-o-y) much above the food articles inflation of 14.1%. Pulses, a perennial source of inflation, had cooled to 2.3% but are expected to hover around 14.5% in fiscal 2011.
The common response to inflation in these items is that this is a seasonal phenomenon. For example variations in the monsoon are well correlated with these prices. That argument is no longer accurate.
In a recent speech, Reserve Bank of India deputy governor Subir Gokarn highlighted the structural nature of inflation in protein-based food items. Historically, in developing societies, dietary patterns change as the income of consumers’ increases. At relatively low levels of per capita income, carbohydrate-rich diets, based on cereals such as wheat and rice, dominate protein-based diets. As incomes cross an inflection point, this pattern changes and protein-rich foods begin to dominate carbohydrate sources. Gokarn has estimated this to be Rs580-690 per month in rural areas andRs1,100-1,380 in urban areas.
By 2009-10, an additional 220 million Indians crossed this inflection point—180 million in rural areas and 40 million in urban areas. This is the structural basis of food inflation in India. This trend, while being positive for any developing country, presents some acute policy problems in India.
For one, all four items—milk, pulses, fish and eggs—have shown serious volatility in production, something that is at the root of their price volatility. In the case of pulses, the problem is compounded by the fact that India is perhaps the single biggest consumer and few, if any, countries produce pulses in quantities that India demands. Within the country, production has been stagnant and their per capita availability has fallen consistently since 1951.
This is no longer a debate about the ineffectiveness of monetary policy in taming food prices. If the trend in these prices continues, it will definitely spill over into general inflation through a wage price spiral. For that to be prevented, the government has to think of robust supply side solutions. It is not doing that.
Is food inflation in India a structural problem? Tell us at firstname.lastname@example.org