|Food for thought|
|Monday, 27 June 2011 00:00|
Despite having got it so horribly wrong on inflation on so many occasions, government economists are back to predicting that food inflation will slow once more grain comes into the market. RBI deputy governor Subir Gokarn argues they’re wrong. At a function in Chennai, he said food prices were no longer as sensitive to the monsoon as one would imagine and that there was sufficient evidence to suggest food prices were driven by more fundamental factors—our columnist Surjit S Bhalla suggested Saturday that it was the global price of oil that was the single-largest explanator of food prices, though it’s not clear if this is what Gokarn had in mind.
Look at the data for the past few years and you find that food prices have risen faster than the overall WPI for the seventh successive year now, something unprecedented since the advent of the green revolution; food inflation touched a peak level of 15.6% in 2010, the highest since the start of the reforms in the early nineties. While the gap between food inflation and WPI was under 1 percentage point in 2005-06 (food inflation was 5.4% versus a WPI of 4.5%), this rose steadily to 11.5% in 2009-10 (15.3% food inflation versus 3.8% for WPI); this declined in 2010-11 but was still a high 6%—and this was despite the 5.4% pick up in agriculture growth in 2010-11 and record grain produced in that year. The most recent trends indicate that the current pick up in agriculture prices is not on account of the core products of the food basket like cereals or pulses, it is due to high-value products like vegetables, fruits, eggs, milk, fish and meat whose demand has risen faster than supply, thanks to the sharp hike in per capita income levels. While the record agriculture output in 2010-11, and especially that of food grains, helped slow the increase in price of cereals, prices of high-value goods accelerated even faster. Numbers show that while the price increase of cereals (including rice and wheat) slowed down from 12.6% in 2009-10 to 6.3% in 2010-11 and that of pulses went down from 22.4% to 3.2%, those of vegetables continued to remain at a high 13%; those of fruits surged to 19.8%. For milk, prices rose from 18.8% in 2009-10 to 20.1% in 2010-11, eggs from 13.5% to 15.2%, marine fish products from 9.8% to 38.8% … What’s not clear though is how more rate hikes will help.