Food & Fuel Inflation
By Dhurjati Mukherjee
The rising prices of food, fertilizer and fuels have reached centre stage with growth expectations becoming lower and monetary tightening on the anvil. Experts are of the opinion that it is debatable how long fiscal policy can withstand the adjustment of financing pressures of higher food, fuel and fertilizer prices. At the global level, the war and related sanctions have pushed up prices of oil commodities, fertilizers, foodgrains, metals etc.
Though Finance Minister Nirmala Sitharaman said a few days back that the country has not breached the inflation target “so badly” while referring to the recent surge in retail inflation which hit a 17-month high of around 6.9% in March, experts believe that prices are in fact destined to increase in the coming months. RBI Governor Shaktikanta Das indicated that the bank’s monetary policy committee (MPC) needs to constantly reassess the situation and tailor response accordingly. According to him, the increase in crude oil price and its direct and indirect effects on CPI contributed to around 60% of the upward revision in projections with the other major contributor being the spillovers coming from global food price shocks.
Das observed that the MPC had stated in mid-April that though food prices may ease with a likely record rabi harvest, edible oil prices are likely to remain elevated in the near term due to export restrictions by key producers as well as loss of supply from the Black Sea region.
Going by the views of the former RBI Governor Raghuram Rajan, the Indian central bank will have to raise interest rates at some point of time to fight inflation and that any such move should not be seen as anti-national. He made these observations in a recent Linkdin post and it comes after retail inflation shot past the upper tolerance limit (6%) of the RBI for three consecutive months. Rajan pointed out that the war against inflation is never over while adding that prices have been rising in the country and, at some point, the RBI will have to raise prices.
Even IMF Chief Economist Pierre-Oliver Gourinc has observed the war was slowing growth and spurring inflation as a “clear and present danger” for many countries. Plus, disruptions to Russian supplies of oil, gas and metals, along with Ukrainian exports of wheat and corn will ripple through commodities markets and across the global economy.
Rising prices around the world show no signs of abating, the IMF pointed out, even if supply chain problems ease. It expects inflation to remain elevated throughout the year, projecting a 5.7% in advanced economies and 8.7% in emerging markets. However, a more realistic projection was made at the Peterson Institute for International Economics, a Washington think tank, wherein economists expect global growth to decline from a rapid 5.8% in 2021 to 3.3% annually in 2022 and 2023.
The inflation rates in the US and the EU exceeded that of India. From mid-March, the Union government steadily passed on higher import costs to retail prices of all fuels. The unemployment rate remains high as the situation is yet to reach pre-pandemic levels while consumption remains depressed. The 7.2% anticipated growth isn’t as strong and even if there is a rise, it should not be forgotten that this is followed by a -6.6% contraction last year.
A section of economists attribute the present trend to what may be called Kondratieff – named after Russian economist, Nicholai Kondratieff – which is caused by technological changes and can last quite long for years together. If such a cycle has begun, commodity prices would keep rising.
As per data released recently in India, inflation, based on the wholesale price index (WPI), jumped to14.6% in March higher than the 13.1% in February and 7.9% in March 2021. WPI inflation has been in double digits for 12 months in a row, the first time ever, highlighting the entrenched price pressures. The present inflation has hurt household budgets and the economically weaker sections and consumption growth has been drastically reduced. Besides, it has been seen that wheat prices rose an annual 14% while fuel and power jumped by 34.5%. Even potatoes soared by 24.6% and vegetables increased by 20% in March.
The chief concern before the country is the steep increase in food prices where the growth outpaced that of rural wages, squeezing real disposable incomes. Food inflation in the country has the singular capacity to encourage households to expect higher inflation in other goods and services in future. It dents demand for consumer items like refrigerators, ACs, motorbikes, cars etc. Already reports indicate that sales of cars and bikes have come down drastically in the last two months, at least in the eastern States.
The scenario is distressing, affecting not just the EWS and the low income groups but shall also have a cascading effect on consumption per se. Moreover, the government will not be able to bring down prices of petrol and diesel, even after international prices come down, as it would have to take care of the fiscal deficit. Already the stock market prices are showing a downtrend as prospects of consumption growth in the present fiscal appears bleak.
Rising food costs would have a major impact on vulnerable households, with one section suffering from under-nutrition while pushing some into poverty and hunger. Moreover, though food prices are high in metros and towns, the farmers are not getting adequate prices that compensate for the rising costs of production.
In the national perspective, it is quite inevitable that development would suffer, at least to a certain extent, as funds would have to be diverted towards fertilizer subsidies, thereby slowing down infrastructure growth. A few days back, against the allocation of Rs 21,000 crore for the first half of the year, the government will now spend Rs 61,000 crore towards subsidy on phosphate fertilizers. The hike in Nutrient Based Subsidy (NBS) is likely to push the government’s fertilizer subsidy bill to around Rs 2 lakh crore, based on current price trends.
Therefore, the Finance Minister’s observations regarding inflation are possibly not tenable. This as there are enough indications the inflation, which breached the upper tolerance level, is expected to remain high at least till June/July, if not longer.
The Indian food security and nutrition situation remains a puzzle and the effect of higher food prices needs to be looked at seriously. The very high rates of economic growth, the decline in per capita calorie consumption as well as the relatively poor improvements in nutrition indicators would be further hampered if food prices continue to rise.
What action the Centre and States would take in such a situation is unknown. However, it would be desirable if the Centre calls a meeting with the States’ Food Ministers to resolve the issue in a judicious manner. The Centre could take some measures in reducing excise of petrol and diesel and request the States to make similar moves. Controlling inflation is critical to boost up consumption demand. Finally, it may be said that more than freebies, regulating food prices are vital for controlling inflationary pressures, as they affect the poor and the impoverished sections of society. — INFA