High food prices eating away at growth
If the prices of food articles in October this year increased by an overall 18.19 per cent as per the government data, things look worse this month, with food and vegetables prices reaching an all-time high and a sudden spurt of over 100 per cent in salt prices in several markets across northern, eastern and north-eastern India, following reports of shortage of this indispensable cooking ingredient sending shivers among housewives, restaurants, dabbawallas, caterers and, of course, gourmets. The common man’s disposable income to buy non-food items is constantly shrinking affecting demand for manufactured products.
The festival season is practically over. Monsoon has receded from most parts of the country, barring Tamil Nadu and Kerala, which get winter rains. Fresh winter crops are fast replacing those items from cold storage in retail stores and stalls. Yet, there seems to be no respite from extremely high prices of food items, forcing the common man to cut down expenses on other consumer goods to meet the ever-inflating food bills. This is bad news for the entire industrial sector, in general, and consumer goods manufacturing industry, in particular. The fear of a further fall in economic growth rate looms large. The RBI’s persistent application of the textbook inflation control policy has clearly failed.
Food inflation threatens to prove the latest government prediction of five to 5.5 per cent GDP growth for the current fiscal wrong. The first quarter GDP grew by a little over four per cent, on the strength of the farm and services sector. The AprilSeptember economic growth figures are receiving final review. They are scheduled to be announced by the end of this month. Industrial production, which is growing at the slowest pace in recent memory, continues to be a matter of concern because of rising inflation and hardening of lending rates. RBI Governor Raghuram Rajan is not left with much room to further jack up the lending rates to rein in the inflationary pressure without hurting economic growth.
In fact, the RBI’s monetary policy has failed to control inflation. On the contrary, high interest rates are singularly responsible for choking the growth of several sectors of economy, such as housing and real estate development, production and sales of white and brown goods and the linked industrial products such as cement, metals, power, paints, wood products, petrochemicals, home furnishings, etc.
Maybe it is time for a rethink on RBI’s inflation control policy, which seems to be heavily tilted towards curtailing monetary expansion. Whereas much of the current high rate of inflation is on account of increasing prices of food items primarily due to supply shortage. And, Finance Minister P Chidambaram is right that demands for certain farm products such as wheat, cereals, vegetable oil, potatoes, onions and tomato are mostly inelastic. They are not subject to monetary expansion or contraction.
Industrial growth across 16 broad groups, including electricity, petroleum and natural gas, petrochemicals, fertilisers, drugs and chemicals, metals, coal and other minerals, railways, textiles, sugar, vegetable fats and oils, tea, coffee, jute goods and salt, during the first half of the current financial year (April-September) had increased by only 0.4 per cent over the corresponding period last year.
High interest rates are hurting the entire industrial sector and housing and consumer products marketers’ normal sales-booster hire-purchase and EMI schemes. These markets are already impacted adversely due to the common man’s lower disposable income, after accounting for almost a 100 per cent increase in householders ’ monthly food bills.
High food prices pushing up the headline inflation to an eight-month high in October have also left the election-bound government highly jittery. The wholesale price index (WPI), on the rise since last April, reached its peak last month, as the retail inflation rose to 10.1 per cent, the highest in the past seven months. Prices in the vegetable segment shot up by nearly 80 per cent in October. Onion prices alone went up by 280 per cent.
This month, prices of potato, tomato, bitter gourd, ridge gourd, carrot and brinjal went up by 100-150 per cent in several markets across the country. Even the prices of generally more expensive protein-rich food items, such as paneer, egg, meat and fish, were dearer last month by nearly 18 per cent as against 13 per cent in September. Similarly, prices of fruits were 13 per cent up and cereal prices rose 12 per cent, all highlighting the stress on the household budget as food represents a vital chunk of monthly expenses.
While the RBI may be theoretically right to fight headline inflation by resorting to dear money policy, the latter has not helped control inflation or the most important cause behind it – the rising food prices. At the same time, the RBI is afraid that cheaper money may further fuel inflation.
High wholesale prices, along with the pressure of stubborn retail inflation, makes it logically difficult for the RBI to cut interest rates to ease the pain of households reeling under the burden of soaring prices of food articles and costly monthly payouts on home mortgages and vehicle loans, among others.
RBI Governor Raghuram Rajan feels retail inflation may remain above nine per cent for the remaining part of the year. "On inflation, both wholesale and consumer price inflation are likely to remain elevated in the months ahead, warranting an appropriate policy response," the RBI said in its recent review of the economy.
Among the measures to tackle food inflation, a major contributor to the WPI rise, are to raise production, maintain proper output and storage data, restrict export of market sensitive food items, import those in short supply, crack down on hoarders and use the public distribution system to reach those sensitive food items to the common man through fair price shops, co-operatives and outlets such as Mother Dairies.
Food price inflation has been posing a major a policy challenge for both, the central and state governments. Scarcity and high food prices have been prompting calls for urgent measures to raise supplies and remove the bottlenecks, which are not happening. The management of food supplies or food scarcity, leading to high prices and headline inflation, is a government function and not of RBI’s. The country’s central bank must note that excess money supply with the public is not causing food inflation, but food shortage largely is.