High food inflation can upset the applecart

Can high food inflation negate all the good that a high growth rate does?

Most of the current statistics regarding the Indian economy indicate it is in good health. But there is one exception – a high level of food inflation. This has been highlighted not by the opposition but by members of the monetary policy committee (MPC) of RBI.

Latest figures indicate that food inflation in November was as high as 8.7 percent, taking overall retail inflation to 5.5 percent, close to the higher end of the tolerance range of 6 percent. An RBI deputy governor and MPC member has frankly admitted that inflation remains highly vulnerable to food price hikes.

MPC Members Concerned

The MPC, with three RBI and three external members, is responsible for laying down the benchmark repo interest rate and is as good a quasi-official source of insight into the country’s economic and monetary condition as you can get. So what MPC members say for the record needs heeding.

If there is high growth with inflation under control, a stable exchange rate and adequate reserves then according to the liberal economics textbooks the country’s policy makers should pat themselves on the back on having got things right and let the economy run without intervention.

If there is one worry among MPC members in the midst of a host of satisfactory signals then that concern needs to be looked at closely in order to ensure that it does not upset the applecart. Can high food inflation negate all the good that a high growth rate does? In the case of food prices and India, that is so.

Cultivators Bear Brunt of Food Inflation

India is still relatively poor, a lower-middle income country, according to the World Bank classification. Nearly half of its population (47 percent) is engaged in agriculture and spend over half of their income (54 percent) on food. Economic policy cannot be said to be doing its job, or must continue to strive for a long time to get things right, if the fruits of high growth bypass the poor cultivator. And if food remains costly, as is the case now, then it can be assumed that the benefits of high growth are not reaching nearly half of the population.

As food takes away around half of what the poor rural Indian spends, he has little left to spend on his children’s education (he spends only 3.75 percent), healthcare for the whole family (6.8 percent), looking after the aged family members who have stopped earning and perhaps most critically, the specific needs of the spouse. When child labour is rampant, unemployment among women is high and the vast majority of rural women spend a good part of their lives working unpaid on the fields and raising children, things have a long way to go before the fruits of high growth can adequately reach those who need it the most.

So what policy changes are necessary? First, what does not need changing is overall monetary and fiscal policy encompassing management of the fiscal deficit and general interest rate structure. If a higher fiscal deficit leads to more money being printed and excess liquidity leads to higher inflation, then drastic cuts in spending will be necessary, which needs to be avoided. Also, using the standard monetary policy tool to address inflation, raising interest rates needs to be avoided so that money does not become costlier for business.

Policy Changes Needed

What needs changing is the following: agricultural policy needs to be urgently revamped. Better water management, better seeds and encouraging farmers to get out of cultivating water guzzling crops like rice, wheat and sugarcane and shift to crops like millets need to be pursued. Procurement policy needs to serve this purpose. Plus farmer producer organisations need to be strongly encouraged so that the farmer gets more of what the consumer spends.

These policies will raise agricultural yields, reduce the need for farm hands, put more income in the hands of rural people who continue to work on farms and enable them to improve the lives of their rural families. Those quitting farms and looking for jobs in services and manufacturing should be able to find them over time as continuing rapid economic growth will require more hands in rural services and businesses from MSMEs to corporates. A low real interest rate, which MPC members have called for, will enable business to access affordable finance.

As agriculture is a state subject, most of the work on the ground, except agricultural research, will have to be done by state governments. So the centre needs to take an initiative along the following lines: tell the states that we need to reform agriculture to firmly enter the post green revolution era, so let us cooperate, setting aside political rivalries.

The additional resources needed for a second green revolution should ideally come by paying less to government employees, both through adoption of the new pension schemes and maybe going a bit easy in raising DA to compensate for inflation. (The rural poor don’t get any DA!) This is easier said than done but that is the direction in which the country needs to move. This is the political challenge that needs to be faced.

Subir Roy is a senior journalist and author. Views are personal and do not represent the stand of this publication.