Global agricultural and food inflation has become a
hot topic since I wrote about four weeks ago. Every
magazine and newspaper worth the name are writing on
it on a daily basis — which isn’t surprising with
wholesale price index (WPI) inflation rising from
early February 2008 and crossing the 7 per cent mark
from 22 March.
How many times have we been in the 7 per cent plus
territory since April 1995? Excluding the present,
we have been there on three significant and two
minor occasions since 1995-96. Let me tell you of
the major ones.
The first of the three was India’s earliest post-liberalisation
inflationary spell. It was a long one, and continued
up to April 1996. The RBI Governor, Dr. C.
Rangarajan, hugely hiked interest rates and
tightened credit for quite a while. His moves, while
they brought down inflation, choked off growth from
1997-98 to 2002-03.
The second instance was between 30 September 2000 to
24 February 2001, triggered by a major hike in fuel
prices. It was a ‘base effect’ inflation — namely,
higher prices being measured against a relatively
low base. While it gave Mr. Yashwant Sinha some
hairy moments in Parliament, the BJP-led government
scraped through.
The third was between 26 June and 4 December 2004,
spurred by double-digit growth in fuel prices and
over 7 per cent growth in the price of manufactures.
It was a time when India was ticking and industry
was in a boom; when asset prices had begun to rise;
and when input prices could be passed on. It was
when Dr. Y.V. Reddy rang his first warning bells.
So, we have been there, and escaped without too much
economic damage, especially on the last two
occasions. Why then should we be more concerned this
time?
Because it is election year; and because of what
this bout of inflation can do to household food
items. To track this episode of food price
inflation, I have created a simple Household Food
Price Index (HFPI) that comprises rice, wheat,
pulses, salt, sugar, spices, edible oils, milk,
fruit, vegetables, eggs, fish and meat. Being a
wholesale food price index, and not a retail one, it
can under-report inflation. Even so, this is what it
says:
• Inflation of household food articles is much
sharper and more volatile than that of overall WPI.
In inflationary periods, household food prices shoot
up much more than WPI.
• From April 2001, household food inflation has been
steadily trending upwards. Yes, there have been
cycles. But the trend is clearly positive.
• As of 29 March, the HPFI inflation was 7.6 per
cent and rising. Edible oil prices were up by over
20 per cent; vegetables were at over 15 per cent;
milk prices were up by almost 8 per cent; and rice
by 8.2 per cent.
Now superimpose a very grim global cereal situation.
A recent Food and Agriculture Organisation brief (FAO,
Crop Prospects and Food Situation, April 2008) says
that while global wheat production is expected to be
6.8 per cent higher in 2008 than 2007, and rice 1.8
per cent greater, higher consumption in Asia and
historically low global stock levels will maintain
pressure on prices. By 2008, world cereal stocks are
expected to fall by 5 per cent to 405 million metric
tons (MT) — down from their already reduced level at
the start of the season, and the lowest stock in the
last 25 years.
Wheat prices have risen by 45 per cent — from $332
per MT in November 2007 to $481 in March 2008. Thai
rice is up by 58 per cent, from $358 per MT to $567
over the same period. The FAO global food price
index in March 2008 was 57 per cent higher than a
year earlier. And the FAO edible oils/fats index in
the first quarter of 2008 was 98 per cent above the
corresponding value in 2007.
We haven’t seen such global food price hikes before;
and there is no evidence of these significantly
easing off in the near future. Also, there is little
that the government can do. It has already banned
exports of edible oils, pulses, non-basmati rice and
wheat. It can further cut customs duties on all key
food items to zero. It can import high priced global
wheat and rice and subsidise these for the poor. The
RBI can raise CRR by 50 basis points, though fat lot
of good that will do to reducing food inflation.
Rapid currency appreciation is out — because
exporters will cry blue murder, and it isn’t easy to
take the rupee up very fast to something like Rs.36
per US dollar, without which there will be no effect
on prices. And the more you ban, the greater you
create a market for hoarding and panic.
Pray. So that El Nino or any other global warning
weather freak doesn’t further play tricks. If that
happens, there will be hell to pay.
Published: Business Standard, April 2008
