Controlling rising prices

Both macro policies like monetary tightening by the RBI as well as commodity-specific measures implemented by the government have to be used to deal with inflation

Onion prices more than doubled in the last two weeks and retail food inflation rose to 9.5 per cent in May as against 8.64 per cent in April, giving the new government more reason to worry. As the urban working class bears the brunt of the rising and fluctuating food prices, Finance Minister Arun Jaitley quickly announced measures to stem the price rise of onions. These included fixing a minimum export price (MEP) of U.S. $500 per MT, distributing onions through the Public Distribution System, and advising State governments to delist fruits and vegetable from the Agricultural Produce Market Committee (APMC) Act.

As much as these short-run measures are necessary, the problem is more deep-rooted. Several interrelated determinants such as low agricultural productivity and yield, global price changes, scarcity of resources such as land and water, domestic price policies such as Minimum Support Prices, and stocking and trade policies (both international and domestic) have played a role in the increase of prices.

With increase in income there has been a decline in intake of wheat and rice, but an increase in demand for foods of high value such as milk, fruits and vegetables, meat, egg and fish. The increase in income has been generalised with MNREGA substantially increasing rural wages. Also, supply constraints such as lack of proper storage and warehouse facilities, which have resulted in post-harvest losses to the tune of 30-60 per cent, have amplified the effects on prices, especially of perishable items. This is quite stark given the mammoth stocking of food grains, especially in light of changing preferences away from cereals. In the case of grains, the extravagant stocking policy works at cross purposes with limited movement of grains in the market.

A long-term view

Food price inflation in India clearly underscores the need for understanding the heterogeneities across food commodities. This knowledge could be important to inform macroeconomic policy. For example, the assumption in standard macroeconomic models — that changes in relative prices of food and fuel represent supply shocks — may not hold for many commodities as we see them right now. Further, with a persistent upward trend in inflation, taking a long-term view rather than focusing only on recent inflation episodes seems imperative. In all this, one thing that is reasonably clear is that it may not be sufficient to identify the sources for high prices at a broad level. Both macro policies like monetary tightening by the RBI as well as commodity-specific measures implemented by different branches of the government (trade policies and domestic interventions in food markets) have to be used to deal with inflation. The questions to ask are: Why have interest rate policies not been as effective as intended? Is food demand interest rate sensitive? Do food prices lead to generalised price changes leading to inflation as macroeconomists know it? Overall, combining both macro as well as micro perspectives may be crucial to design policies to rein in inflation. Inflation in India demands the need for a Jaitley-Rajan fellowship.

Remedial options

Faced with the current scenario, what are the remedial options? For one there seems to be little reason to not liquidate excessive wheat and rice stocks. In distributing released stocks, the government should think about an incentive overhaul along the lines of what was done in Chhattisgarh. The small State is a leading example of a well-functioning PDS system where leakages have been checked because of measures like colour coding of transport vehicles and raising the commission of PDS shopkeepers. Over time, there must be a gradual movement toward a cash transfer system. This depends on development of backend facilities such as bank outlets.

In food items with a high value, a case- by-case approach is needed. While onions could be facing a problem of excessive hoarding due to expectations of inflation, in commodities like milk the cost push might be playing a role. Dairy products such as oil cake and molasses are increasingly being diverted to alternative uses or markets. Milk has been the prime driver of inflation for many years and though its demand has been rising substantially (different estimates show that it is the food item with the highest income elasticity), there are supply side issues that need to explored for finding the right policy mix.

Given the current government’s paradigm of accepting short-term pains to incur long-term gains, it should seize this opportunity of high food prices. Investing in the private sector in cold chain or processing units needs to be encouraged. This will create rural jobs that are not farm-related, and create more efficient value chains, giving a better deal to farmers and consumers alike. Over the long run, streamlining wholesale markets under Agricultural Produce Market Committees, reducing limitations on private-sector procurement and storage, and checking on double taxation in interstate movement, need to be considered.

Finally, as a weak monsoon is being predicted, we must think of the long run. It is about time we gear up toward climate-smart agriculture (drought-resistant crops, conservation agriculture, etc.) to increase yields and income of farmers. This will increase farmers’ productivity while providing the much-needed price stability to consumers. The promise of acche din for consumers and the agricultural industry need not be a far cry.