|
Business
FINANCIAL SCENE
Galloping inflation, a cause for conern
|
It is the rise in foodstuff prices that is causing anxiety although prices of other items in the inflation index have gone up even more
|
There are no quick-fix solutions. Imports, wherever possible, will come at a heavy price.
Inflation measured on a Wholesale Price Index (WPI) basis climbed to 7.41 per cent in the week ended March 29 over the comparable period last year. It had crossed the psychologically important mark of 7 per cent the previous week.
The sharp acceleration in inflation ought to worry the government which has already taken a number of fiscal measures to improve the supply side of agricultural and other commodities. It is the rise in foodstuff prices that is causing considerable anxiety although prices of other items in the inflation index, notably basic metals and alloys, have gone up even more.
Sensitive issue
Inflation is an unacceptable tax on the poor who are affected the most. The articulate middle class is also feeling the pinch. In almost every country, the middle class, because it can organise itself better, is able to effectively air its grievances. Several governments have been voted out, partly because of their inability to check prices of essential goods. Pakistan is a recent case.
In India, obviously, the price rise, especially of food articles, dominates politics and will be the most important plank on which the coming elections, beginning with Karnataka next month and going all the way to the general elections next year, will be fought.
There are no easy or quick fix solutions to the price problem and inflationary expectations. If there is a growing belief that further price rises are inevitable, consumers as well as producers and other economic agents will condition their behaviour accordingly. For instance, there will be a clamour for higher wages. And employers will be more willing to concede.
Expensive food imports
There are certain unique features that distinguish the current price surge from the previous ones. Food prices have risen despite satisfactory monsoons. Imports of wheat have been resorted to in the past and the Government has already announced its intention to do so again. However, importing wheat and other foodstuff at the current juncture may not be a desirable option on grounds of costs but may become unavoidable.
The world over, soaring food prices are threatening food security and causing riots in in many countries. According to the Food and Agriculture Organisation (FAO), food prices have gone up by 75 per cent in dollar terms since 2000. The price rise was particularly marked during 2007. Prices of wheat and rice have been climbing new highs even as their stocks are plummeting.
Rising consumption
Prices of these staples are likely to remain sticky because of a number of well documented factors. These include a rise in consumption in India and China. A fast growing middle-class is also diversifying its food basket. Eggs, poultry and other forms of animal products are becoming popular. This increases the pressure on foodgrains. Large quantities of grain go into animal feed.
The effects of climate change on agricultural production are now being well documented. Australia, a prime wheat producing region, has had droughts for two years in a row.
Inclement weather in Ukraine and in Latin America has resulted in lower production of staples. Another important cause has been the push to bio fuels at the expense of food crops.
Rich countries such as the U.S. and the EU subsidise their farmers producing bio fuels.
In short, at a global level, there is a shortage of food. Most optimistic estimates speak of at least a ten-year horizon before agricultural production can be stepped up to meet the global demand.
The implications for India are profound. Just the other day, the Government announced that it would build strategic reserves of five million tonnes of wheat and rice over and above the buffer stocks.
This is clearly a move to moderate inflationary expectations even as it aims at providing food security.
However, building reserves will not be any easier than procuring foodgrains for the public distribution system. Imports, at the current high prices, will be imperative in the larger interests of food security and inflation containment.
The Government has done well to hedge a part of wheat purchases (by STC) in the international markets. One particular transaction widely reported has taken the form of buying a call option which is to be exercised by July 15. In this forward contract, the Government will have the right but not the obligation to buy 1.8 lakh tonnes of wheat at $406 a tonne.
There is a premium of $35 a tonne. Depending on prevailing prices in June-July, the Government can take a view. The certainty of wheat availability — at a price — is a favourable factor that could to some extent douse inflation expectations.
It is quite likely that domestic prices of wheat, rice and other agricultural commodities will seek parity with global prices.
Agriculture Minister Sharad Pawar has talked of benchmarking domestic prices against global ones. As the winter wheat crop starts arriving in the markets, even the seemingly high minimum support price may be inadequate to procure enough grains for the public distribution system. High food costs may, therefore, remain with us for a while and with it a relatively high level of inflation.
RBI moves awaited
The annual credit policy is to be announced on April 29. The Reserve Bank of India will also have to reckon with an economy that is slowing down.
Also, capital flows from abroad to bridge the current account deficit cannot be taken for granted.
The Government would favour strong anti-inflation measures such as increase in cash reserve ratio or even a mark up in interest rates. There are no clear cut answers.
C. R. L. NARASIMHAN
Printer friendly
page
Send this article to Friends by
E-Mail
Business
|
