India's food inflation plunged to a near four-year low as prices of vegetables and cereals tumbled, official data showed Thursday, marking a rare piece of good news for the embattled government. Food price inflation has been in double digits all year, causing hardship for India's impoverished masses and heaping pressure on the Congress-led government reeling from graft scandals and charges of policy paralysis.
Annual food inflation dropped to 1.81 percent for the week ended December 10 from 4.35 percent in the previous week, as prices of essential produce such as vegetables, onions, potatoes and wheat fell sharply. "It's a welcome direction - we could even see food inflation go below one percent in coming weeks," Yes Bank chief economist Shubhada Rao told AFP. The drop in food inflation raised chances the central bank could start reversing its aggressive string of interest rate hikes that have slowed the economy, Rao added. Food inflation, a key driver of headline inflation which measures the cost of goods across the economy, now is at its lowest level since early February 2008 when it stood at 2.26 percent.
Onions are 50 percent cheaper than a year ago while potatoes cost 34 percent less, helped by a bountiful monsoon and a high year-ago base effect. The food inflation drop comes after annual headline inflation hit a year's low of 9.11 percent in November after crossing 10 percent two months earlier.
If inflation keeps moderating, the central bank "may go for a rate cut in the first quarter of 2012", Crisil chief economist D.K. Joshi said. Rao said she expected the first rate cut in March. Top government economic advisor C. Rangarajan said overall inflation should be around seven percent by next March - within the central bank's so-called "comfort zone".
The bank has raised interest rates 13 times since March 2010 to choke inflation, angering business leaders who complain the monetary tightening has hit economic growth and investor confidence in the South Asian giant. The government expects growth of 7.5 percent this year, down from an earlier 9.0 percent estimate. Such growth, while robust by anaemic Western levels, is not strong enough to significantly improve lives of India's 1.2 billion people - 75 percent of whom live on under $2 a day, according to the World Bank.
The latest bout of food inflation, normally triggered by droughts and bad harvests, has lasted far longer than previous stretches. Central bank deputy governor Subir Gokarn has blamed the long stretch on the failure of food producers to keep pace with growing demand. The government recently shelved plans to open up the retail sector to foreign supermarkets amid huge political opposition that could have led to Western-style large-scale agribusiness and reduced massive food spoilage.