The International Monetary Fund (IMF) has warned that food inflation in India is likely to rise again unless steps are taken to increase farm productivity and investment.

In a paper on selected issues in the Indian economy, the IMF says that, as the economy picks up, pressure on food prices is likely to reappear.

The study says that while India’s economic growth accelerated during 2003-11 to an average of about 8¼%, accompanied by an even stronger pick-up in the growth of private consumption, the average agricultural gross domestic product, or GDP, growth remained unchanged at about 3¼% per year, resulting in excess demand for food, giving rise to the relative food-price inflation.

It points out that growth in food inflation outpaced non-food inflation by an average of around 7½ percentage points per year during 2006-10. Since 2010, non-food inflation has picked up, averaging 9½% during 2010-13, a full 3 percentage points higher than the average of 6½% recorded during 2006–09.

What this shows is that even as the food price rise moderated, its increase in earlier years led to entrenched inflationary expectations and fed into higher wages, thus keeping the headline inflation high. The lesson is that if food prices are allowed to spiral out of control once again, it will sooner or later feed into core inflation, too.

The good news is that while spending on eggs, milk, fruits and vegetables is likely to increase with higher income, their growth in production, too, has been higher.

Nevertheless, the paper says, “Indian food inflation is likely to exceed non-food inflation by 2½–3 percentage points per year, assuming private consumption growth picks up to 7% per year and food supply growing at historic rates. Therefore, the suitability of a long-term inflation target of 4%—as recommended by Patel Committee Report—depends on enhancing food supply, agricultural market-based pricing, and reducing price distortions."

Note that, in terms of the Central Statistics Office’s new GDP estimates, private final consumption demand is estimated to be 7.1% for the current fiscal year. With higher growth next year, the pressures on food inflation can only increase.

Note also that the IMF projects average consumer price inflation for 2015-16 at 6.3%—higher than the Reserve Bank of India’s lower-than-6% target for January 2016.

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