(Illustration: Saurabh Deb)

There is a fear of a repeat of what happened in 2006, according to Anjan Roy, economic advisor, Federation of Indian Chambers of Commerce and Industry (Ficci). He reminds us that high food prices, along with high crude prices in 2006, resulted in the Reserve Bank of India (RBI) raising interest rates and draining money supply. “That action led to rise in the prices of manufactured goods also,” he says. Roy hopes that RBI does not repeat its mistake and end up hurting the entire economy while wrongly trying to contain food inflation by curtailing demand for food.

Bibek Debroy, a faculty at the Centre for Policy Research, argues that high food prices are here to stay as the demand for food has gone up without commensurate growth in production of food. Structural changes such as the advent of modern retail has also added to the trade demand for the same lot of food, he points out. “There is no correlation between food inflation and monetary policy,” he says.

However, the RBI, in its Q1 monetary policy review, has alluded to inflationary expectations linked to uncertain monsoon, that has a direct impact on food prices in the country, while raising its inflation projection for March 2010 to 5 per cent from its earlier forecast of 4 per cent.

While monetary response to food inflation and its inflationary fallout on the rest of the economy is still a matter of conjecture, corporate marketers are trying to factor in the impact of food inflation on consumer sentiment.

However, Anisha Motwani, executive vice-president marketing, Max New York Life, is already worried. “Though there is no data point yet to show that consumption is getting affected by skyrocketing food prices, but it is only logical to expect higher food prices will affect non-food spending for the bottom half of the population,” she says, adding that the overall business environment is still difficult and this food inflation is not helping.

Food inflation and poor monsoon could also result in wage inflation, but not in a rush, according to Manish Sabharwal, chairman, Teamlease, a temping outfit with about 75,000 employees. “The labour market is still very much in the grip of the employers and employees do not have any bargaining power yet.”