At last some growth is in sight for an economy struggling to keep pace for the past two years, but the inflation is not coming in control. There are no demand side pressures, output gap is still negative, and core urban inflation has been tamed. It is the food items – both perishable and nonperishable – that have refused to calm down.
Many observers are of the view that there are elements of hoarding in staple items – especially, wheat and sugar. Others are worried about the supply chain disruption due to closing of borders with neighbors, changing weather pattern, locust invasion, and overall administrative failure. One interest fact is that perishable food inflation is rampant in neighboring India as well. A primitive supply chain infrastructure lacking basic storage and cold chain facilities appears to be common to both economies.
Of course, the currency adjustment over the past two years has played its role, as pass through in commodities could be synced to crop and demand cycles. In the past many years, domestic prices were at premium to international prices (in dollar terms) for most commodities, thus there was little incentive to exports, whether legally or through smuggling routes. However, there was strong incentive for imports – both legal and illegal, as the currency had been artificially kept overvalued making imports cheaper. This may have been especially true in the case of wheat and powdered milk. Unfortunately, actual domestic output of both staple commodities is unknown. In wheat, all available information is based on extrapolation from government procurement data, buying of formal food industry, and flour mills. Rest is assumed to be consumed at farm level to reach a desirable publishable figure. Similar argument holds true for sugar.
Seeing the recent price hike, one can fairly assume that there is a gap between demand and supply, even both sides of the equation remain unknown. There could be a case of illegal exports of wheat. There could also be the case of illegal imports in the yesteryears – which may no longer be taking place due to depreciation. There could also be a case of hoarding by local players which is suspected by the government. Eventually, all and any of such actions by both private and public sector economic agents will bring domestic prices in line with international prices. Unless the government keeps on making mis-steps and ends up allowing market players to compensate themselves for higher cost and keep margins intact at yesteryears levels.
Whatever the reason, persistent high food inflation is a bitter reality for a country where food is over 40 percent in average household consumption basket. It’s a matter of dire importance for a country where nutrient intake is already low as malnourishment and wasting & stunting is putting the future generation at risk. It’s a point of concern for the PM whose dream is to take masses out of the poverty.
Focusing all the government machinery on searching for reasons behind food inflation and taking measures to bring prices back appears more of a wish than a workable, sustainable policy. Instead. the government needs to give up its infantile fixation with price-fixing.
At this point the best government can manage is to use Ehasas programme to ensure food supply to those who are in need. The government can ensure imports of commodities to counter hoarding; but domestic prices are not really higher than international. The prices were bound to converge, and it is finally happening. The focus should be to enhance the earning power of people so that they are protected from market-based disruptions. Thus, the focus should be on growth. Monetary policy must focus on growth rather than controlling inflation.