Moneycontrol Pro Panorama | There is no crash diet to get over inflation 

inflation

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Food inflation is driving the government up the wall, but the monetary policy committee (MPC) is keeping calm. The minutes of their August meeting show that members believe that food price spikes must be looked through until they become generalised. The MPC is on the right path even though headline inflation is nowhere close to their mandated 4 percent target, making the committee look less credible.

The question now is whether the spike in prices of tomatoes, onions, cereals, and pulses would persist. Unfortunately, the answer is never straightforward as there are many unpredictable factors at play, the key one being the monsoon. The rainfall pattern has not exactly adhered to the spatial and temporal distribution required for a hassle-free harvest.

Our Monsoon Watch captures the deficit that key states have witnessed in rainfall while some have witnessed floods. The upshot is that overall crop yield is still uncertain, but that is the only important piece to solve the food inflation puzzle.

For now, MPC member Ashima Goyal believes that food inflation spikes are temporary and should be looked through, the minutes showed. Furthermore, the Indian farm sector’s dependency on monsoon has reduced with better irrigation and modern farm methods, she added. But Michael Patra, Deputy Governor of the Reserve Bank of India (RBI), warns of second round effects of food inflation. “….in India, food price flares can permeate through wages, rents, transport costs and, importantly, through expectations into core inflation,” he said according to the minutes. Patra is not wrong as past episodes of high food inflation have been known to become generalised. The 200 percent surge in tomato prices may have forced Burger King to remove it temporarily from its plate, but eventually the fast-food joint may have to increase its retail price to accommodate higher prices. It is not just tomatoes but pulses and cereals that go into making the buns and breads of burgers that are also on the rise now.

The government is rightly rattled and the motivation to bring down inflation through fiscal measures is not entirely driven by politics and upcoming elections. The cardinal truth about inflation is that even when prices fall back after a spike, they often do not go all the way down to the original level. Once prices increase, they tend to stay at least slightly above the level they had risen from. What the government can do by quickly responding is to narrow the distance between the original level of price and the new higher price level.

Which explains why New Delhi imposed a 40 percent levy on onion exports and is looking to even change the way Indians eat by encouraging use of chana dal more than the more expensive tur dal. My colleague Pallavi Singhal has all the details in her piece.

But the government’s reaction to food inflation every time shows the central government does not have a long-term fiscal policy for agriculture. With climate change effects becoming all too real for the farm sector, the Centre needs to step up now. Economists point out the damage that ad hoc and reactive government measures can cause, which our columnist Subir Roy lays out in his piece here.

The effective way to put the food inflation genie into the bottle is to have a stable and well thought out policy that touches upon climate change, supply management and price stability. Measures such as stock limits, tax levies and even prescribing diet changes are just temporary band aids.    

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Aparna Iyer
Moneycontrol Pro