Food Inflation – Indian Story

I guess food prices are on the rise everywhere. In India, food price inflation is now unbearable though overall inflation has tapered down a bit. In normal circumstances, a government could have been voted out, it is that bad.

You can see it clearly when you go for grocery/vegetable shopping. Occasionally I accompany my wife, and was I shocked today ?

Yes, of course. The price of onions (Rs 40 against Rs 15 in the past) was shocking. Ladies’ Fingers costs Rs 52 per kg. One single drumstick costs Rs 8 to 10 ! I do not have month-by-month data, so I am not able to compare the prices in Nov 2010 with those of Nov 2009.

Well, on one side, India is doing great on economic growth rate. The second quarter (July to Sep) saw GDP growing by 8.7%, as against 8.8% of the first quarter (Apr to Jun). All indications now are pointing towards another good quarter when December ends – may be around 9% or even more. This would mean for the entire fiscal year of 2010 – 11, India would probably achieve a GDP growth rate somewhere between 8.8 and 9.0%. And, that would be really commendable in a year that was filled with many uncertainties, and would only be second to China’s economic growth.

So, what should be the response of the Reserve Bank of India ? The problem with food price rise is not consumption, but related to supply-side. Supplies are not measuring up to the demand, so the prices are rising. Can this translate itself into some related inflation – say, on the manufacturing side for instance ? May be, we have to wait and see. If that happens, then the RBI might have to step in and raise interest rates. But that would constrict growth, which is now coming back to normalcy.

It is going to be a very difficult choice. The economic stimuli by the Government of India, needs to continue at least until March 2011, especially for exporters, as export revenues while growing are under pressure from an appreciating Rupee. So export stimuli should not be withdrawn hastily at this time. If that is the case, then the only possibility is management of the various interest rates open to the RBI. Liquidity is not at dangerous levels yet, so depleting liquidity should not be resorted to urgently either.

Interesting dilemma, but India is in a much better shape than most other countries.

But what about the common man on the streets of India ? Looks like he has to fend for himself, and I believe he is surely cutting down on consumption – here I am referring to consumption of vegetables and groceries.

Vijay Srinivasan
28th November 2010


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