Inflation in India has remained stubbornly high despite the best efforts of the Reserve Bank of India (RBI). The two key measures of inflation, the wholesale price index (WPI) and the consumer price inflation (CPI) have not shown any signs of stabilizing, let alone falling. In the month of November the WPI rose to 14 month high of 7.52%; while the CPI rose to a record 11.24%. The main reason for the persistently high inflation has been rising food prices.
Food inflation accelerated to 19.93% in November from 18.19% in October. It was driven due to a sharp rise in prices of fruits, vegetables, pulses and cereals. This has burnt a big hole in household budgets across the country. What accounts for the high food inflation? A one line answer would be, India's misguided agricultural marketing policies. The central government procures food grains, mainly rice and wheat, through an open -ended system of minimum support prices (MSP). This artificially distorts the agricultural market by constraining the supply of grains and results in higher prices.
However the centre alone is not the one at fault. As an article in the Business Standard points out, the state governments are equally to blame. They have not reformed their archaic laws with regards to the Agricultural Produce Market Committee (APMC) mechanism These APMCs are very inefficient and add significant mark ups to the price of fruits, vegetables and cereals because of fat commissions paid out to agents. This results in a big difference between wholesale and retail prices.
One possible solution to fix this problem could be to offload surplus stocks that are available in domestic and export markets. By selling this stock at a price higher than the MSP but lower than the market rate, the government can ensure that it finds its way into the hands of the end consumer. This will also reduce food inflation and have the positive effect of reducing the food subsidy bill; thereby helping the government to keep its fiscal deficit in check.
Irrespective of the method that is adopted, it is imperative that food inflation is bough under control quickly. This would result in higher household savings and lower levels of inflation overall. In such a scenario, the RBI may even consider cutting interest rates. Lower interest rates would certainly give the economy a boost. But this will not be possible if food inflation continues to remain high.