again in 2007-08. High, double-digit inflation has been observed in more than one food category every year.
In addition, within food products, protein (milk, eggs, meat and fish) inflation has been stubbornly high as supply struggles to catch up with demand. The sharp rise in rural wages and increasing incomes have created demand for these items, while little has been done to create conditions to improve supply. The consequence is high and sticky protein inflation.
If the current low growth-high inflation nexus continues, incomes will not rise fast enough, while the purchasing power of consumers will keep getting eroded, particularly of those whose wages are not indexed to inflation. The current milieu has already sheared financial savings as households have shown a preference for physical assets such as gold and housing. Apart from macroeconomic instability, high inflation is also a tax on the poor.
The task before the new government is thus clearly laid out. In addition to reviving business sentiment and growth, it needs to have a concrete plan to bring inflation, particularly food inflation, down structurally and curb its volatility. And apart from closely monitoring the monsoon and preparing a contingency plan to deal with its failure, certain steps need to be taken to curb food inflation.
First, the timely and effective use of food stocks can help dent inflation. The inability of the government to intervene on time by releasing grain stocks has led to the persistence of high inflation even in cereals such as rice and wheat, which are overflowing in FCI warehouses. Rice inflation was 12.6 per cent and wheat 6.3 per cent in March 2014, whereas their stocks far exceed buffer norms.
Second, improving storage and logistics for perishables, and revoking the APMC acts is critical. Vegetable inflation has shown rising volatility over time with each peak higher than the one before it. The wastage of fruit and vegetables is estimated as being around one-third of production by Crisil. While Icrier notes that 15-25 per cent of total produce sold is wasted due to the multiple intermediaries and poor mandi infrastructure, perpetuated by the APMC acts. The dismantling of APMCs will promote efficient markets in the agriculture sector and trigger investments in logistics, thereby benefiting both farmers and consumers. However, this will need to be complemented with government efforts to improve rural infrastructure connecting farmers with robust agricultural markets.
Third, the improvement of supply response is the order of the day. Three things will need to be done for this. Improving agricultural productivity will be a long-drawn project and will require a mix of better irrigation, improved seed variety, the diffusion of technology to farmers and the judicious use of fertilisers. China produces twice the amount of rice, 1.5 times more wheat and 3.5 times more coarse cereals per unit of land than we do. We desperately need to catch up with them.
Crop diversification with a focus on fruit and vegetables is also important. The government needs to exercise restraint on minimum support price increases. The sharp increase in the …continued »