Battling Food Inflation in India

Inflation has been the bane of the Indian economy for many years now. In the last decade food inflation has been estimated at an average of about 8.1 %. In more recent times, food inflation has even peaked to about 10 % at times. In May 2014 food inflation was pegged at 9.5 % going by the wholesale price index and 9.4 % measured by the consumer price index. The overall inflation based on the wholesale price index rose to 6.01 % in May – the highest it has been in 5 months now. Food inflation is one of the greatest challenges faced by the newly-formed Narendra Modi administration – a short term reprieve must lead to a long term solution. The prices of even essential food items such as vegetables, fruits, cereals, and eggs have risen exponentially leading to such inflation and allied roadblocks to setting the economy back on track.

With May 2014 inflation figures turning out to be higher than anticipated, Finance Minister Mr. Arun Jaitley quickly rushed to examine the issue. He announced that “speculative hoarding” and a rise in fuel and energy costs were the two leading causes for bottlenecks that led to a rise in prices of food commodities. Of the 22 commodities monitored by the government for price rise about 4-5 have shown a sharp increase, he acknowledged. In his Facebook post, the FM said, “The rise in prices of food articles can also be attributed to withholding of stocks on account of apprehension of a weak monsoon”.

On Tuesday, 17 June, 2014, the FM chaired an emergency meeting to finalize steps to handle rising points. Among the government’s anti-inflation measures a huge quantity of rice is likely to be released into the market and the import of pulses, cereals and edible oil is to be considered. The Commerce Ministry, Ms. Nirmala Sitharaman, fixed the minimum export price for onions at $300 (about INR 18,000) per tonne. Export of onion shipments amidst skyrocketing prices in local markets had created a furor last year. The government is now contemplating fixing a similar minimum export price for potatoes as well.

The FM further advised state governments to delist fruits and vegetables from the Agricultural Produce Market Committee (APMC) Act. Most markets that sell agricultural products are regulated under the state APMC Acts and hence farmers and producers are not allowed to carry on wholesale marketing activities freely. Freeing perishables such as fruits and vegetables from the purview of the APMC Act means farmers will be free to sell their produce directly. Not only will this bring down prices, it is an important measure that shall dissuade hoarding by middlemen. The APMC Act was instituted for the purpose of protecting farmers and producers from the exploitation of intermediaries and middlemen. The issue of these traders’ licenses, however, has led to monopoly and promoted hoarding. Abolishing the system again denies the farmers the logistics and transportation support required for direct marketing.

The first among many major battles that the newly sworn in Finance Minister Mr. Arun Jaitley has set out to face is the ever heightening rate of inflation. This one, quite honestly, though, could be a tough nut to crack. Inflation, specifically food inflation, has been one of the biggest causes of the downfall of the UPA government after almost a decade at the center. In developing nations, particularly in fast-growing economies such as our own, a moderate to high inflation is not surprising. Adding to this are woes such as volatile monsoons affecting food crops and food production, and a booming international price of crude that has defied all controls. The upcoming budget will need to balance all priorities – boosting growth and reviving economy, while checking the rising prices and inflation.

Taming rising prices and inflation will also require stringent Reserve Bank of India action such as keeping a tab on the fiscal deficit of the nation. RBI Governor Raghuram Rajan is unlikely to ease interest rates any time before the budget is announced for decreasing interest rates is again likely to hike up the prices. To check food inflation a great deal of infrastructural support is required – storage and warehousing, transportation, direct marketing support for producers etc. These have now become expectations to be fulfilled by the NDA government.

Food inflation checks take a considerably long time to show results. Is India willing to wait? Is the new FM up facing to his first great challenge? The weeks to come hold the key to the answer, but it seems quite certain that checking food inflation shall determine, in a great measure, the success of Mr. Arun Jaitley.