The Hindu Business Line : Food price threat remains serious

Bangalore, Feb. 5 In its third quarter review of monetary policy, the Reserve Bank of India has downplayed the threat posed by persistent food price inflation. It has said that wholesale price inflation, ruling at 5.6 per cent, will moderate to “below 3 per cent by end-March 2009”.

It has expressed the view that consumer price inflation, in double digits for both agricultural labour and for industrial workers in December 2008, “would also decline, though with a lag”. However, for this to happen, food price inflation should recede. There are no policy indications on how this can be achieved.

The correlation between movements in WPI and CPI since 2006-07 ranges between 0.62 and 0.65 – which is quite high but does not rule out scope for short-term divergence.

The gap between the two can rise to about three percentage points during episodes of high inflation in food articles, as food articles account for 15 per cent of the weight of WPI but between half and two thirds of the weight of urban and rural consumer indices. Conversely, when food prices are not rising that sharply, WPI and CPI can converge, as they did in March 2007.

In fact, between April and August 2008, monthly CPI for industrial workers was lower than monthly WPI. It overtook the latter in the third quarter of 2008-09, as WPI inflation in food articles began to rise after July 2008 to enter into double digits after October. Now, a food crisis is for real.

Contrary to popular perception, WPI inflation between December 2007 and July 2008 was driven less by foodgrains and more by manufactured food products (11 per cent weight in the index). Hence, CPI was below WPI in the early months of 2008-09.

Dr R. Sthanumoorthy of the Indian Institute of Management, Kozhikode, told Business Line, “When everyone was talking about a food crisis in 2007-08, WPI inflation in food articles was moderate between December 2007 and July 2008. What were driving the WPI during this period were manufactured food products and non-food items within primary articles, rather than foodgrains. But the trend has reversed since July 2008 without anyone really noticing. Now, the food situation looks serious.”

He pointed out that WPI inflation in food articles increased from 5.3 per cent for the week ended July 5 to 10.2 per cent for the week ended October 4.

It has remained close to double digits ever since, touching 10.5 per cent for the week ended December 20. In contrast, Dr Sthanumoorthy said that food products inflation (such as dairy goods and sugar) declined from 13.8 per cent in the week ended July 5 to 3.4 per cent in the week ended December 27. The decline has been steep since the week ended October 4, when food products inflation stood at 10 per cent.

Dr Ramesh Chand of the National Centre for Agricultural Economics and Policy Research said, “High food prices are here to stay. They can only be addressed through productivity improvements in agriculture.”

Agriculture grew by 2.9 per cent in real terms in the first half of 2008-09, against 4.5 per cent in the corresponding period in the previous year. At this rate, the prices of essentials may remain firm. The country is faced with the possibility of a downturn and unemployment in industry and services on the one hand and relatively high food prices on the other.

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