The inflation rate persists at a level well above 6 per cent per year, driven primarily by food prices. After being in a macroeconomic comfort zone for quite some time, the government clearly faces a major challenge in dealing with this situation, particularly because it is not really amenable to the traditional anti-inflation medicine of monetary restraint.
I had argued in my previous column that there were also signs of demand-pull inflation in the economy, reflected in the inflationary pattern amongst manufactured goods. This should be responsive to the combination of repo rate and cash reserve ratio measures that the Reserve Bank of India is implementing.
But, food prices are a different animal altogether.
Current pressures on food prices are a combination of temporary and structural factors. Periodic disruptions in the cultivation of various vegetables and fruits cause prices to rise, but these are typically short-lived and prices return to normal as the next crop comes in.
There is really very little room for policy intervention. Conversely, while there is a lot of room for policy intervention as far as the structural factors are concerned, these will only have an impact over time; immediate relief is not on the cards.
The two crops in which the impact of structural problems is most manifest are wheat and pulses. A look at the pattern of price increases in these products in the context of their supply situation is instructive.
As far as wheat is concerned, with the exception of a couple of months in early 2004, for four of the last five years, the annual rate of increase in wholesale prices never exceeded 5 per cent.
Even in those exceptional months, the rate was only a bit higher than that mark. However, in January 2006, the rate of increase accelerated sharply to 9 per cent.
Although it dipped close to 8 per cent in a couple of months subsequently, it has stayed well above 9 per cent for most of the last 14 months, hovering in the 17-19 per cent range for much of the latter half of 2006.
During this period, production was quite volatile. From a peak of about 76 million tonnes in 1999-00, total output has hovered in the 65-70 million tonne range over the next few years. In a couple of years, it exceeded 72 million tonnes and, fortunately for consumers, it is expected to do that during the current year. In a scenario of declining or stagnant production, stocks hold the key to price stabilisation. What has happened on this front?
A few years ago, the High-level Committee on Foodgrain Stocks, chaired by Prof. Abhijit Sen, had recommended an optimal reserve of about 22 million tonnes, comprising about 14 million tonnes of rice and 8 million tonnes of wheat. Of course, this number should change over time, but it nevertheless provides a benchmark, significant deviations from which should have an impact on prices.
At the end of 1998-99, wheat stocks were 9.7 million tonnes. They climbed steadily over the next few years (remember, production was stagnant), peaking at a huge 26 million tonnes by the end of 2001-02. They declined to about 16 million tonnes in the subsequent year, but after that fell precipitously to 4.1 million tonnes by the end of 2004-05.
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