RBI Bulletin: Need 'major reforms' in supply chains to control food price shocks

Vegetable inflation shot up to 37.3 percent in July, as per latest CPI data.

In what may be a pointed comment at the government, an article in the Reserve Bank of India's (RBI) monthly bulletin has called for "major reforms" to the country's supply chains of perishable items such as vegetables.

"The vulnerability of the economy to recurring incidence of vegetable price shocks, especially ahead of and during the monsoon, warrants major reforms in perishable supply chains covering transportation networks, warehousing and storage technologies, and value addition processes that damp the amplitude of these swings," said the regular State of the Economy article - which includes RBI Deputy Governor Michael Patra as one of its co-authors - published in the central bank's monthly bulletin on August 17.

The views expressed in the State of the Economy article do not reflect the central bank's official stance. However, on August 10, Governor Shaktikanta Das had said that "frequent incidences of recurring food price shocks...pose a risk to anchoring of inflation expectations".

"The role of continued and timely supply side interventions assumes criticality in limiting the severity and duration of such shocks," Das had said while announcing the Monetary Policy Committee's (MPC) decision to leave the policy repo rate unchanged at 6.5 percent for the third meeting in a row.

India's headline retail inflation is heavily influenced by food prices, with developments in July being the perfect example as Consumer Price Index (CPI) inflation skyrocketed to a 15-month high of 7.44 percent – well above economists' expectations of 6.6 percent – from 4.87 percent in June. This was on account of a huge increase in vegetable inflation to 37 percent from -0.7 percent in June.

"Stable prices for consumers, assured supplies, and remunerative proceeds for farmers will follow when these reforms lead to efficiency and productivity gains while preserving the quality of output and building up insulation against food inflation from climatic events," the article went on to add.

The government, on its part, has taken a number of measures to check the rise in food prices – from distributing tomatoes at discounted prices in major consumption centres to conducting open market sales of rice and wheat via e-auctions and banning the export of non-basmati white rice.

However, prices are still rising, with the State of the Economy article noting that those of cereals and pulses continued to increase in August. Meanwhile, tomato prices have also pushed higher, although latest data is indicative of "some pullback".

Also Read: Tomato red-hot no more as price cools to Rs 100/kg and soon heading to Rs 30

Economists expect CPI inflation to again come in above 7 percent in August, data for which will be released on September 12.

In an interview to Moneycontrol on August 17, Finance Secretary TV Somanathan said that while inflation had peaked, the government will continue to take more steps to keep prices in check. However, knee-jerk reactions will be avoided, the top finance ministry official had said.