In mid-January, Tejinder Arora of the popular Shaan E Punjab Dhaba in Kalkaji, south Delhi, handed out a new menu card to all his customers and added an apology for, nothing on it had changed, except the prices. A roti or flatbread now cost Rs5 instead of Rs3, while chicken curry was dearer by 15%.
“We held out for two years, but the rising costs of wheat and chicken are taking away even our modest profits,” he says.
Arora had earlier thought of increasing prices from April, but decided to advance the date after the inflation index began to nudge up from February.
For the week ended 16 February, spurred partly by food and oil prices, inflation measured by the wholesale price index, which reflects producer prices, moved up to 4.89%, just below the Reserve Bank of India’s comfort level of 5%.
Finance minister P. Chidambaram, in his 2008 Budget speech, warned that inflation remained the biggest macroeconomic challenge in the current year and that supply management would be a key to containing its spread— especially with farm output projected to grow at only 2.6%. The government’s priority is to ensure “close to 9% growth and close to 4% inflation”, Chidambaram added.
Chetan Ahya, South Asia economist at Morgan Stanley, agreed that “the government does not have any easy policy options to address the challenge of inflation”, which he thinks could cross 5% in six-eight weeks after an initial post-budget moderation owing to excise duty cuts.
Agflation, a term coined to mean inflation in agricultural commodities, has ruled the globe since last year, though economists didn’t really expect it to recur so soon in India, which saw food inflation scale 10% last year.
Anindya Mitra, senior analyst at Moody’s Investors Service, feels the problem of an uptick in inflation is puzzling, “given the beginnings of a global slowdown, which includes India. This conundrum is not India specific; it has spread through several countries in Asia. Singapore and Hong Kong are experiencing record high inflation, and China’s and Indonesia’s problems are well known”.
According to Ahya, the current spurt in domestic inflation is “due to sharp rise in global commodity prices, including food, oil, metals and chemicals”. Since the beginning of 2000, domestic agricultural output growth has averaged at a little more than 3%, with wild year-to-year fluctuations. Foodgrain production could be a little higher than last fiscal’s record of 219 million tonnes (mt).
At the same time, economists say they fear that if the Budget does succeed in its intent of stimulating consumption demand, then the supply shortfall could pose even greater policy problems.
Shashank Bhide, senior research counsellor at National Council of Applied Economic Research, a think tank, also said that the Sixth Pay Commission awards due in April as well as the Rs65,000 crore debt writeoff for farmers could also boost demand in the economy.
Right now, the supply-demand mismatch is evident in pulses and rice, where prices have gone up 10-15% in the open market. Although wheat procurement was higher by more than 20% at 11.12mt in marketing year 2007-08, rice procurement was 7.5% lower at 9.17mt till November. Since April 2007, prices of wheat in the international market have risen by 88%.
Over April 2006 to December 2007, the Economic Survey 2007-08 estimates, food articles, rice, edible oil and pulses, contributed the most, or almost 25%, to inflation.
Ashok Gulati, director (Asia), International Food Policy Research Institute, said, “Higher support prices serve to raise production as well as prices. Farmers will always switch to crops where they get a better return. Last year there was glut in sugar, now it seems there may be a shortfall. But the government never seems to be budgeting for the shortfalls.”
According to N.K. Singh, former revenue secretary, the “food security issues have not even been considered in the Budget”.
Last year the government imported 6.5mt of wheat, and has already contracted for 1.8mt in the current year. This would need to be supplemented by higher allocations for the public distribution system, as well as long-term agricultural growth, said Prasenjit Bose, convenor (research), Communist Party of India (Marxist).
Meanwhile, to tackle inflation in the short term, Ahya said “the government is likely to opt for ad hoc intervention in domestic commodity markets. If commodity prices shoot up by another 10-15%, assuming capital inflows are still supportive, the Reserve Bank of India will allow an appreciation of the exchange rate as the second best option to ensure that headline inflation remains under 6%.”