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More On Inflation

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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. 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 tonnes (MT) - down from their already reduced level at the start of the season, and the lowest stock in the last 25 years.

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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 — 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.

The author is chairman of CERG Advisory. [email protected]

(Businessworld issue 22-28 April 2008)

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