Home / Opinion / Columns /  India must prepare for a long battle against inflation

Data on inflation released by the Indian government’s ministry of statistics has confirmed fears of a rising-price spectre in the midst of an already-fragile economic recovery. Overall retail inflation in India, based on the consumer price index (CPI), was at 6% and has been rising steadily now since September 2021. This may not look too high, given the double-digit levels seen in the past, but it is the rise in food inflation that is a potential concern. Food inflation was less than 1% in September-October 2021, but shot up to 5.4% overall and 5.9% in urban areas by January 2022. Within food, apart from the usual suspects of fruits and vegetables, it is edible oils that have seen consistently high inflation in their prices, with their average price-rise in the last 18 months at a high 24%. An entrant in this group of specific worries is cereal inflation, which jumped to 3.4% in January after eight months of negative inflation, a good run that was broken last September.

These trends mirror a worrisome trend in the country’s wholesale price index (WPI), which has seen 10 straight months of double-digit inflation. Even in this index, food-item inflation is at 10.3%, accompanied by a sharp acceleration in cereal-price inflation. As with the CPI’s retail trend, WPI cereal inflation has shot up to 5.5% after 13 months of negative inflation until August. This has come at a time when agricultural production in the country, including that of foodgrains, has reached record levels. By recent official estimates, foodgrain production in India is expected to cross 300 million tonnes again this year.

Within cereals, it is primarily maize, barley and wheat that have seen a sharp reversal in trends, with all three of them witnessing double-digit inflation after negative inflation until the second half of 2021-22 or so. This is partly due to the indirect impact of a rise in petroleum prices, which tend to push up the prices of food crops that are used for ethanol production as a fuel substitute. The prices of all these crops have seen a rise in international markets as well, and the food price index of the Food and Agricultural Organisation (FAO) is at its highest level ever.

As with India’s case, global food price inflation is also driven largely by cereals and edible oils, the prices of which are closely related to international hydrocarbon-market prices, particularly of those crops that can be used for ethanol production.

While international price transmission has pressured domestic prices of cereals higher, India’s own policies have contributed to this problem in no small measure. The stock of foodgrains in India’s central pool as on 1 January was 86 million tonnes. This figure went up to 87 million tonnes on 1 February. This is more than four times our buffer norm requirement of 21 million tonnes.

This is also despite Indian food exports having reached their highest level under the present government, with more than 15 million tonnes of food- grain exported during April- November 2021 alone. While the government has taken advantage of high prices in international markets to offload stocks, this has been at the cost of availability of essential cereals in the local market.

By hoarding foodgrain stocks, the government is effectively reducing domestic supply, which, unless demand drops equivalently, puts upward pressure on prices.

Given the geopolitical developments in Europe that have pushed global oil and gas prices up, it is unlikely that India’s inflationary pressures will recede in the near future. The fact that our inflationary trends happen to be strengthening at a time when India’s economy is struggling with deficient demand also implies that any attempt to contain inflation through the use of deflationary policies could threaten a nascent economic recovery by further compressing aggregate demand.

Although India’s policy choices are limited, the endeavour should be to protect vulnerable sections of the Indian population from the effects of inflation. Fortunately, the high stocks available with the government can be used to contain domestic food prices. This would at least require an extension of the Prime Minister Garib Kalyan Yojana (PMGKY), which was designed to provide foodgrain to beneficiaries. The scheme, which was scheduled to be withdrawn after 31 March, the end of fiscal year 2021-22, should be extended further until the Indian economy fully recovers and food inflation ceases to be a worry.

While food hand-outs may provide the vulnerable relief in the short run, the task of increasing incomes and aggregate demand would also require the government to continue with an expansionary fiscal policy. This implies widening India’s social protection net rather than withdrawing essential subsidies on food and livelihood. The 2022-23 budget decision to reduce subsidies drastically on food and fertilizers is unlikely to help reduce today’s inflation, given its nature. On the contrary, inflation may rise further due to a rise in fertilizer and energy costs along with higher food prices. Exactly how inflation moves may be debatable, but it will certainly worsen Indian prospects of an economic recovery.

Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi

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