Without supply-side changes, no option to rate hikes
Finance minister P Chidambaram is absolutely right when he said, at the annual bankers’ conference last week, that monetary policy has no impact on food prices which are really driving up inflation. But RBI Governor Raghuram Rajan who talked of how the central bank had to ‘focus the laser light on inflation’ is also right since, once inflationary expectations run high, this gets factored into all contracts including wage agreements. Given that Rajan said monetary policy was a blunt instrument and had to be used carefully, the question is how inflationary expectations can be tempered. To some extent, Chidambaram answered the question when he said supplies had to be augmented and this required changes in the supply chain, the distribution logistics, the entire production chain.
But given that much of the agricultural chain is in the domain of the states, what can the central government do—if states like Punjab and Haryana put a 14.5% mandi tax on purchases of wheat and rice in the mandis, the Centre can do precious little. While that is true, the Centre has various levers. Two of the biggest mandis in India, in Azadpur and in Vashi, are in the Congress-ruled states of Delhi and Maharashtra—just opening up these markets will ensure farmers get higher prices for their produce since licensed commission agents charge up to 10% for a few minutes job of concluding a sale. The larger problem, in the case of the Food Security Act (FSA), is that a virtual monopoly has been created for FCI as a result of which private traders are driven out of critical markets—once again, that jacks up prices. If this isn’t bad enough, the FSA ensures the returns farmers get from growing wheat and rice are higher than for other crops, thereby accentuating the supply crisis in fruits and vegetables. Fixing supply chains will take a while but these measures, along with others such as lowering unnecessary hurdles in the way of FDI in retail—without this, no supply chains are possible—are critical.