In August I wondered how many bad monsoons it’ll take for us to realize that we have to tackle food inflation by dealing with issues like irrigation, food storage, distribution, cold storage etc., and not tinkering with interest rates, but it seems that all we needed was a good monsoon to drive home the point.
As I read through the Second Quarter Review of Monetary Policy 2010 – 2011 by Dr. D Subbarao – the concern about inflation, specifically food inflation, and more specifically structural food inflation was quite apparent to me.
The primary food inflation itself has lowered from 21.4% in May 2010 to 15.7% in September 2010 (from very high to still quite high), but what is interesting about this is that the year on year rate in protein based food items such as pulses, milk, eggs, fish and meat still remained at 23.9% in September 2010. These items were at 34% in May 2010.
The report goes on to state that the inflation rate for the protein rich items has not moderated as much as you’d expect with a normal monsoon, and this is partly due to the changing consumption patterns, and “inadequate supply responseâ€.
From the report:
Further, notwithstanding some moderation, food price inflation has remained persistently elevated for over a year now, reflecting in part the structural demand-supply mismatches in several commodities – besides protein sources, oilseeds and vegetables also show this pattern. Given the changing consumption patterns and as yet inadequate supply response, food price inflation is becoming increasingly structural in nature. Further, even as non-food manufacturing inflation has indeed moderated, it still remains above its medium-term trend.
This is quite serious coming from the RBI governor, and coupled with all the noises about opening up FDI in multi – brand retail, – I feel that Indians are finally going to get a glimpse of what shopping in Walmart feels like.
Opening up multi brand retail has always been a tricky issue because of the fear that hundreds of thousands of mom and pop stores will go out of business, and while I personally don’t subscribe to that view – I can certainly understand where the apprehension is coming from.
A long time ago – as part of my summer training I worked for IFB – the washing machine company, and my boss there told me that when they first heard that the likes of LG and Samsung are coming to India – they were really worried that these giants will drive them out of business, and they’ll be on the roads, but they soon found out that they can compete and even outdo these businesses.
I am sure some of you will also remember the massive scare that computerization brought to the Indian public sector and how everyone was worried that the computer will replace them and they’ll lose their jobs.
India has done well in cautiously opening up it’s economy, and assimilating with the global economy better, and in a world where Venkateshwara Hatcheries buys a European football team – we should be more confident about our abilities, — all the more so when we desperately need the cold storage infrastructure and other expertise that will help us prevent the wastage of lakhs of tons of foodgrains and help us move up from a pathetic rank of 67 out of 85 countries in the Global Hunger Index
Hi,
See inflation is a phenomena it cannot be controlled by say building irrigation project or cold storage etc. Inflation should be in comfort range i.e. it cannot be 5% or 8% or any specific number for that matter may be sometimes 10% inflation is also good. Inflation primarily is a function of money supply and by tinkering short term interest rates RBI tries to bring it in a comfortable range. Actually no body should tell market as to what to do just because you are looking at some historical number which you are comparing to last year this date (simply means inflation). US’s Paul Volcker tried it in 1980’s and they paid for it. Japan in 1990’s and they are paying for it.
So RBI knows Cost and Benefits of its action & I think every time they do a fantastic job.
Thanks for your comment Niranjan, and I absolutely agree that RBI is doing a great job! With respect to food inflation – the aggregate demand for high protein food sources and others has increased in the past few years due the general increase in income levels, and though last year we saw a bad monsoon which acted to choke supply, this year even though the monsoon has been good the prices have not moderated because the demand itself has increased. So in my view – if we can increase the supply by reducing wastage or increasing productivity we will see supply increase to match that increased demand, and will see food inflation down because of more reasonable demand – supply levels.
That would also help bringing the target inflation more in line with RBI’s comfort zone or target which is what you touch upon also.
Hey! Congrats on the great article.
We have a very common view of financial matters in general. You, like me, strip down issues to the core, and look for genuine long-term solutions.
I had like to have a chat over the phone and am hoping to make an acquaintance, if you are fine with it.
Please leave me your no. in my email if you are interested, and i will get back to you.
Regards,
Parth Patel.
Thanks Parth!