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Amid declining wages and job opportunities, rising inflation is likely to add to economic distress in India. Inflation data based on the consumer price index (CPI) released this week would suggest a softening, with this measure declining to 4.5% year-on-year in October from more than 6% in May and June, and food inflation falling to less than 1%. This may be good news for the Reserve Bank of India, but any complacency would not only be premature, it could also create challenges for an economic recovery.

One cause of worry is our inflation based on the wholesale price index (WPI), which was at 12.5% in October. This is the seventh month that this measure has been in double digits, and unlike CPI inflation, it hasn’t shown any pattern of secular reduction. Moreover, wholesale food inflation has declined much slower than the retail kind. Lower food inflation is largely thanks to fruits and vegetables, which have seen prices decline more than 10%, and also meat and dairy products. On the other hand, prices of cereals have started rising, breaking the 13-month spell of negative inflation before September. Within cereals, wheat prices have increased 8% and maize by more than 10%. The other category that has seen a sharp increase in prices is edible oils.

The food price index of the Food and Agricultural Organization (FAO) for October was at its highest level in the past decade. Within the food group, the FAO index also reports faster inflation for cereals and edible oils. For both these groups, the rise in international prices is partly a result of a sharp rise in petroleum prices internationally. Increasing oil prices result in higher demand for grains that can be used for ethanol production. The spillover effect of these is felt on other foodgrains. Supply bottleneck and adverse weather concerns have also prompted countries to hoard grain stocks, causing supply shocks in the global market.

The FAO and other agencies expect rising inflation to persist in the medium term. International price pressures as well as increasing domestic demand as economic activity returns to normal would drive inflation. The third factor that may stoke food inflation is an increase in input costs in the agricultural sector. Diesel and electricity prices have increased sharply, while a rise in fertilizer prices has further pushed up the cost of cultivation. There are already reports of fertilizer shortages and uptrends in their market prices in several states. Finally, there is a likelihood of inflation persisting on account of a wage-price spiral setting in, as seen in some developed countries.

What makes this spell of inflation worrisome is its nature and likely persistence in the short- to medium-term. Also the fact that there are very few options of controlling it. Monetary policy is unlikely to be of any help. While global price movements may be beyond the control of domestic policy, any attempt to control inflation for consumers would likely hurt the agrarian economy, which has been in distress for the past five years. Rising input costs and low domestic demand have already strained agricultural profitability. On the other hand, allowing inflation to go unchecked is not an option at a time when distress in the economy is still near a peak. Falling casual wages, lack of employment opportunities and dearer essentials have worsened many human development indicators, nutritional outcomes included. Recent data on access to education points to a widening gap between the rich and poor and high drop-out rates in many states.

The challenge for the government is not just to control inflationary pressures and protect the real incomes of those at the bottom of the economic pyramid, but also ensure that the cost of this exercise is not borne by farmers. This will require it to use public expenditure to protect the profitability of farming by enhancing subsidies and access to essential inputs. At a time when government granaries are overflowing with foodgrain stocks (at 82 million tonnes on 1 November against our buffer requirement of 30 million tonnes), this is also a perfect opportunity to expand the public distribution system (PDS) through universalization and an expansion of entitlements, such as the addition of pulses and edible oils to the PDS basket. This must be supplemented with the reopening of schools and anganwadis everywhere and enlarged access for children and pregnant women to food schemes. The government may have few options for inflation control, but it clearly has the resources and institutional structures to protect our citizens from its worst effects.

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

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