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Food inflation’s dubious record

Food inflation’s dubious record
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First Published: Sun, Oct 03 2010. 08 15 PM IST

Updated: Sun, Oct 03 2010. 08 15 PM IST
Last week, the country, at least some segments of it, celebrated the Sensex vaulting to a 33-month high and within striking distance of a new record. Around the same time, the country was steadily inching towards another record, a dubious one that affects the lives of everyone: food inflation was poised to complete 16 months of double-digit acceleration at the end of September. This is a tale of two contrasting records, which is a poignant reminder of the new Indian reality.
While the performance of the Sensex, which impacts the lives of, at best, the rich and the middle class, is noted and reported across various mediums, the persistent pressure of food inflation seems to be the confine of a diminishing breed of activists. Capital Calculus commented on this phenomenon—“The baffling silence of the masses”—on 13 December. In November last year, food inflation touched a 11-year high, and has remained firm thereafter.
Although policy planners, including the finance minister and the deputy chairman of the Planning Commission, have been quick to welcome the meteoric rise of the Sensex and subtly suggest that it was a reflection of astute economic planning, they have had at best only hope and homilies to offer as explanation for the vexing problem of food inflation. Mint ran a graphic, “Talk is Cheap”, on 22 June (www.livemint.com/manufacturinginflation.htm), documenting this hapless response of the country’s policy planners; every time they said the inflation rate would moderate it only went up higher. What comes through is that they are unable to explain the causes, and hence, not surprisingly, are not able to put forth a credible claim on when inflationary pressures would ease.
Also See The Great Divide (Graphic)
The numbers are scary. The adjoining graphic clearly demonstrates the problem, with inflation averaging 17.34% in the 15 months ended August. To the layperson, this simple average may mask the impact in absolute terms. What this means is that if a food item had cost Rs 100 in August 2008, it had risen to Rs 117.34 a year later, and was in August worth Rs 137.69. Think about it. Unless your salary/income went up commensurately, you would be cutting into either your savings or cutting back on consumption elsewhere—because you can’t crimp on consumption of food. One is reminded of former prime minister Atal Bihari Vajpayee’s taunt on inflation during an election campaign, when he asked the crowd at a rally how long they would continue to dilute their lentils with water. Predictably, the message struck an instant chord.
It is even more confounding, given that the country now has excess food stocks, some even rotting. If there are sufficient stocks in hand, how come there is such a mismatch in demand and supply. One argument, credibly so, is that there has been a big upward push for demand for food articles, following the success of the government’s rural employment guarantee scheme. If that is indeed the case, then there was a need to manage supply of foodgrains to the market to avoid the demand-supply mismatch resulting in a sustained increase in prices.
Now the fear, already expressed by the Reserve Bank of India (RBI), is that persistent food inflation has begun to impact inflationary expectations, and is spilling over into other sectors. According to RBI’s computation, inflation in the non-food component of manufactured products, often referred to as core inflation, has been steadily increasing, rising from around 1% in December to over 7% by end-June. The recent interest rate increases by RBI have obviously come in response to this assessment.
Politically, the Congress-led United Progressive Alliance (UPA) should be grateful that there have been no electoral challenges, and hence the damage done by its policy failure is not visible as yet. The first test is coming up with elections to the state assembly due in Bihar later this month. It will be interesting to see whether the electorate holds incumbent chief minister Nitish Kumar of the Janata Dal (United) responsible or the Congress, which leads the coalition at the Centre.
UPA has also been lucky that the country has been served up with several distractions. The mess surrounding the preparation for the Commonwealth Games, while politically damaging, especially in respect of the insinuations of corruption, has also served as a distraction. Similarly, the decision of the Lucknow bench of the Allahabad high court to bring forward its verdict (given that one of the judges was due to retire on 1 October) on the controversial title dispute over the 2.77 acres of land in Ayodhya, has served to divert public attention; the contentious nature of the verdict will only prolong the reaction.
Significantly, the persistent rise in food inflation has come about at a time when the political leadership of the Congress is locked in a battle of wits with the government over the creation of a right to food legislation; guaranteed foodgrains at an affordable price could never have meant more. It will be interesting to see how the record food inflation influences the ongoing debate over a food security Bill.
Graphic by Ahmed Raza Khan/Mint
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at capitalcalculus@livemint.com
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First Published: Sun, Oct 03 2010. 08 15 PM IST