Government's decision to allow foreign direct investment in multi-brand retail will help increase productivity and ensure an efficient foodgrain distribution network to tackle high food prices, Reserve Bank of India Deputy Governor Subir Gokarn said in Chennai on Wednesday.
"The ultimate solution to high food prices is very simply more production of things that people consume more. You might debate the merits and demerits of FDI in (multi-brand) retail. But let's focus on the basic problem. We need to increase productivity and distribution efficiency", Gokarn said at a function in Chennai.
Observing that India has a low foodgrain productivity and inefficient distribution, he said increasing the scale of investments in organised retail is one way to increase productivity and distribution efficiency.
"FDI is an enabler of that. Whether you accept the argument that FDI will do this or not, we have low productivity, we have inefficient distribution (mechanism)", Gokarn said at the 102nd AGM of Southern Indian Chamber of Commerce and Industry.
He called for solutions to take the country's economy towards a strong growth momentum.
"We have to look at the stress points. What are the stress points? We have to look at the sources of imbalances in the macro-economic situation and we have to find solutions that will provide robust responses to these constraints", he said.
The RBI Deputy Governor also pointed out that if food prices keep on increasing, it would impact wages and subsequently lead to inflationary pressures.
"It is also important to recognise that if food prices keep growing, that impacts wages, which impacts expectations and in turn feeds into the inflationary process", he said.
He said RBI has been trying to play a "balancing act" to maintain credibility and meet expectations of various stakeholders "without putting undue disproportionate pressure on the growth momentum."
Gokarn said the demand for two-wheelers, television sets and cellphones had grown by "leaps and bounds" in the last 10-15 years, but there was not as much demand growth for food products.
"Why should we not expect to see the same for food and people moving beyond rice and wheat to other items?" he asked.
He said the supply of two-wheelers, television sets and washing machines or air-conditioners was growing in multiples of 20 or 30 on their output.
"This is not matched or not seen in the food sector, where productivity of many things has remained quite stagnant.
"Persistent imbalances in demand-supply have resulted in this very strong and structural inflationary pressure", he said.
Observing that India has a "fiscal problem" and there is a need to find a solution to it, he said, "no solution will work with any effectiveness unless the (government's) subsidy is addressed because it is by far the largest single burden on government finances".
He said global and domestic developments would have an influence on the economy's growth and, in particular, to the inflation trajectory.