Open
Forum
New
Delhi, 4 May 2022
Food & Fuel
Inflation
CENTRE-STATES ACTION VITAL
By Dhurjati Mukherjee
The rising prices of food, fertilizer and
fuels have reached centre stage with growth expectations becoming lower and
monetary tightening on the anvil. Experts are of the opinion that it is
debatable how long fiscal policy can withstand the adjustment of financing
pressures of higher food, fuel and fertilizer prices. At the global level, the
war and related sanctions have pushed up prices of oil commodities,
fertilizers, foodgrains, metals etc.
Though Finance Minister Nirmala Sitharaman said
a few days back that the country has not breached the inflation target “so
badly” while referring to the recent surge in retail inflation which hit a
17-month high of around 6.9% in March, experts believe that prices are in fact
destined to increase in the coming months. RBI Governor Shaktikanta Das
indicated that the bank’s monetary policy committee (MPC) needs to constantly
reassess the situation and tailor response accordingly. According to him, the
increase in crude oil price and its direct and indirect effects on CPI
contributed to around 60% of the upward revision in projections with the other
major contributor being the spillovers coming from global food price shocks.
Das observed that the MPC had stated in mid-April
that though food prices may ease with a likely record rabi harvest, edible oil
prices are likely to remain elevated in the near term due to export
restrictions by key producers as well as loss of supply from the Black Sea
region.
Going by the views of the former RBI Governor
Raghuram Rajan, the Indian central bank will have to raise interest rates at
some point of time to fight inflation and that any such move should not be seen
as anti-national. He made these observations in a recent Linkdin post and
it comes after retail inflation shot past the upper tolerance limit (6%) of the
RBI for three consecutive months. Rajan pointed out that the war against
inflation is never over while adding that prices have been rising in the
country and, at some point, the RBI will have to raise prices.
Even IMF Chief Economist Pierre-Oliver
Gourinc has observed the war was slowing growth and spurring inflation as a
“clear and present danger” for many countries. Plus, disruptions to Russian
supplies of oil, gas and metals, along with Ukrainian exports of wheat and corn
will ripple through commodities markets and across the global economy.
Rising prices around the world show no signs
of abating, the IMF pointed out, even if supply chain problems ease. It expects
inflation to remain elevated throughout the year, projecting a 5.7% in advanced
economies and 8.7% in emerging markets. However, a more realistic projection
was made at the Peterson Institute for International Economics, a Washington
think tank, wherein economists expect global growth to decline from a rapid 5.8%
in 2021 to 3.3% annually in 2022 and 2023.
The inflation rates in the US and the EU
exceeded that of India. From mid-March, the Union government steadily passed on
higher import costs to retail prices of all fuels. The unemployment rate
remains high as the situation is yet to reach pre-pandemic levels while
consumption remains depressed. The 7.2% anticipated growth isn’t as strong and
even if there is a rise, it should not be forgotten that this is followed by a
-6.6% contraction last year.
A section of economists attribute the present
trend to what may be called Kondratieff – named after Russian economist,
Nicholai Kondratieff – which is caused by technological changes and can last
quite long for years together. If such a cycle has begun, commodity prices
would keep rising.
As per data released recently in India,
inflation, based on the wholesale price index (WPI), jumped to14.6% in March
higher than the 13.1% in February and 7.9% in March 2021. WPI inflation has
been in double digits for 12 months in a row, the first time ever, highlighting
the entrenched price pressures. The present inflation has hurt household
budgets and the economically weaker sections and consumption growth has been
drastically reduced. Besides, it has been seen that wheat prices rose an annual
14% while fuel and power jumped by 34.5%. Even potatoes soared by 24.6% and
vegetables increased by 20% in March.
The chief concern before the country is the
steep increase in food prices where the growth outpaced that of rural wages,
squeezing real disposable incomes. Food inflation in the country has the
singular capacity to encourage households to expect higher inflation in other
goods and services in future. It dents demand for consumer items like
refrigerators, ACs, motorbikes, cars etc. Already reports indicate that sales
of cars and bikes have come down drastically in the last two months, at least
in the eastern States.
The scenario is distressing, affecting not
just the EWS and the low income groups but shall also have a cascading effect
on consumption per se. Moreover, the government will not be able to bring down
prices of petrol and diesel, even after international prices come down, as it
would have to take care of the fiscal deficit. Already the stock market prices
are showing a downtrend as prospects of consumption growth in the present
fiscal appears bleak.
Rising food costs would have a major impact
on vulnerable households, with one section suffering from under-nutrition while
pushing some into poverty and hunger. Moreover, though food prices are high in
metros and towns, the farmers are not getting adequate prices that compensate
for the rising costs of production.
In the national perspective, it is quite
inevitable that development would suffer, at least to a certain extent, as
funds would have to be diverted towards fertilizer subsidies, thereby slowing
down infrastructure growth. A few days back, against the allocation of Rs
21,000 crore for the first half of the year, the government will now spend Rs
61,000 crore towards subsidy on phosphate fertilizers. The hike in Nutrient
Based Subsidy (NBS) is likely to push the government’s fertilizer subsidy bill
to around Rs 2 lakh crore, based on current price trends.
Therefore, the Finance Minister’s
observations regarding inflation are possibly not tenable. This as there are
enough indications the inflation, which breached the upper tolerance level, is
expected to remain high at least till June/July, if not longer.
The Indian food security and nutrition
situation remains a puzzle and the effect of higher food prices needs to be
looked at seriously. The very high rates of economic growth, the decline in per
capita calorie consumption as well as the relatively poor improvements in
nutrition indicators would be further hampered if food prices continue to
rise.
What action the Centre and States would take
in such a situation is unknown. However, it would be desirable if the Centre
calls a meeting with the States’ Food Ministers to resolve the issue in a
judicious manner. The Centre could take some measures in reducing excise of
petrol and diesel and request the States to make similar moves. Controlling
inflation is critical to boost up consumption demand. Finally, it may be said
that more than freebies, regulating food prices are vital for controlling
inflationary pressures, as they affect the poor and the impoverished sections
of society. ---INFA
(Copyright, India
News & Feature Alliance)
|