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Rediff.com  » Business » 'Food Bill could unleash new wave of inflation'

'Food Bill could unleash new wave of inflation'

By Devjyot Ghoshal in Singapore
June 16, 2011 19:19 IST
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India's fiscal policy is not supportive of monetary measures that the country's central bank is employing to fight rampant inflation, the prime minister's honorary economic advisor and former International Monetary Fund chief economist Raghuram Rajan said, while singling out the proposed Food Security Bill as a particular cause for concern.

The Bill, which proposes to give about 68 per cent of population the legal right to subsidised food, will not only widen the fiscal deficit further, but could also spark a new round of inflationary pressures, if it is introduced before the food distribution, procurement and supply systems are improved, he warned.

"Without fixing the food distribution system, without fixing the constraints on food production, on spoilage, on storage, just upping the demand suddenly could create a whole new wave of inflation," Rajan said.

"And, interestingly, this kind of inflation could hit the weaker segments of the population, who don't have access to the kinds of fair price shops that others have access to. We need to be careful about expanding quickly some of the entitlement programmes and that, to my mind, is where there is a danger that fiscal (policy) may not support monetary (policy)."

Despite the Reserve Bank of India raising key policy rates nine times in just over a year, the headline inflation number remains stubbornly high. However, according to the latest figures, food inflation moderated to 8.37 per cent in May from 8.71

per cent in April.

But even as the debate over specifics in a draft copy of the bill, drawn out by the National Advisory Council, continues, Rajan remained critical of the concept and timing of the proposed legislation. Instead, he said, the focus should be on rebuilding a broken system.

"Even the notion that this is going to be good for inclusiveness can be questioned, if you don't have the system working well. Why don't we first focus on getting everybody in, getting the system of procurement and distribution working well and then slowly build-up the entitlement as we have fiscal space? Nobody is saying don't build up the entitlement, but this is not the right time and the right way to do this," he said.

Although Rajan, who teaches at the University of Chicago's Booth School of Business, admitted there are no two ways about the need "to bring up the part of the population that has fallen behind", he questioned the necessity to hasten the process.

"Pre-crisis, the fiscal (deficit) was getting into shape. There was a tightening of the budget and so on, (but) that blew out again post-crisis. The worry is that there is a sense that India needs more inclusive growth. Inclusive sometimes means populist and populist means more measures which will increase spending power through re-distribution but without the supply-side being fixed... If the supply doesn't keep pace, there are big problems," he said.

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Devjyot Ghoshal in Singapore
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