Rise in food prices a cause of concern

A sharp price in food price inflation has been a major cause of concern of our economy during 2010-11, however, high inflation in food article is not unique to India.

The Economic Survey tabled today in the Lok Sabha by the Finance Minister Shri Pranab Mukherjee, says that the whole sale price index (WPI) of food inflation rose to 13.6 per cent in December 2010 on account of unfavourable agricultural supply conditions coupled with the waning of base effects.

There are signs of food and fuel price increases spilling over into general inflation. The financial year 2010-11 started with double digit high line inflation and after four successive months (April to July) it came down to single digit.

The inflation which has come down to 8.23 per cent in January 2011 is expected to remain in single digit in next two months.

Among food items sharp rise in prices was observed in onion, fruits, eggs, meat, fish and milk. The prices of food grains, however, remain low on the back of good monsoon.

The main items of concern in non-food inflation are raw cotton, raw jute, raw silk, copra, caster seed, sun flower, raw rubber, copper ore, zinc, petro chemical, intermediate and industrial machinery and machine tools.

The Survey points out that the rise in the purchasing power owing to rapid growth of economy and inclusive programmes like the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) partly might have contributed to the upward trend in inflation.

The Survey observes the policy challenges of maintaining the growth momentum in the economy with price stability is going to be a main key focus area for monetary policy and macroeconomic management.

The measures taken during the year included selective ban on exports and future trading in food grains, zero import duty on select food items and distribution of imported pulses and edible oils through the PDS.

The RBI also took several measures for monetary management. It raised policy rates six times and retained cash reserve ratio at 6 per cent of the net demand and time liabilities (NDTL) of banks. As a result, the money market generally remained orderly in 2011.

The Survey says that the inflation outlook will be shaped by the food price situation and the demand side pressures in the economy.

The current growth and inflation trend warrant persistence with and anti-inflationary monetary stance.

It suggests that the concurrent consolidation of fiscal deficits will, however, be essential as it is expected to ease the conduct of effective monetary policy in near future.

It says that the reduced fiscal deficits will permit greater availability of credit to sustain growth, while tighter monetary policy starts to transmit its impact in reducing inflationary pressure.

Source: PIB