Inflation has consistently been a problem for the Reserve Bank Of India (RBI) who can do little about it. Surging food prices were a key driver of headline inflation over the past year which only began to ease towards the end of 2011, in part due to the base effect from surging prices a year earlier and declining global and domestic food prices. As a result, inflation started to ease and the RBI cut benchmark interest rates by 50 basis points. However world food prices are on the rise again. After four months of consecutive price decline, world food prices increased by 8% from December 2011 to March 2012. This was due to higher oil prices, adverse weather conditions and Asia's strong demand for food imports.
India's consumer price-based food inflation (CPI) also rose to 8.22% in March from 6.62% in February 2012. India, which has the largest population living on less than USD $1.25 a day, has experienced significant increases in the price of food.
There are several factors (both domestic and global) that have contributed to the high food prices. First, there is lack of godowns to store food grains. Second, ineffective public distribution system (PDS) and Third, low food production. Currently only 30% of the food grain is being lifted from the market for PDS. Thus unless these structural issues gets sorted out, India will continue to battle high food prices. Though poor producers and net sellers of food benefit from higher food prices, most poor people, including all the urban poor, who typically spend more than 50% of their incomes on food, lose as very high food prices curtail their purchasing power.
Food inflation is likely to pinch Indians at least until July (when the monsoon sets in) as fruit and vegetable output shrinks, hurt by rising temperatures and a lack of water. At the same time, edible oil and pulses prices are rallying on lower production and a more expensive world market. Rising food prices will add to problems for the fractious coalition government, which has been weakened by a slew of scandals, and will make it difficult for the central bank to cut high interest rates, which are hindering growth.