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India indicating persistent food inflation due to MSP hike: Rangarajan
Saturday, May 25, 2013 08:00 IST
Our Bureau, Bengaluru

India has been indicating persistent food inflation. The high foodgrain prices are largely attributable to the consistent sharp increase in the minimum support prices (MSP). In the case of other food articles, C Rangarajan, chairman, Economic Advisory Council to the Prime Minister, stated that the demand has outstripped the supply while growth in output stands reasonable.

“Intervention in the foodgrain markets by using stocks available with public distribution system has an important role to play in moderating the foodgrain prices. However, the structural factor of the impact of minimum support price remains,” said Rangarajan, speaking on the topic ‘Current Economic Situation – The Way Forward’ at a session organised by the Bangalore Chamber of Industry and Commerce (BCIC).

“Food comprise several categories such as grains, vegetables, fruit, milk and eggs, meat and fish. What we have seen in the last three years is food inflation that had remained high because of the spurt in the prices of one category of food articles or the other. The retail inflation still stands much higher at 9.2 per cent. However, inflation was largely due to certain severe supply constraints, particularly of agricultural products,” he said.

“Inflation is triggered primarily by supply side shocks. However, this does not mean that monetary policy and fiscal policy have no role to play. Food price inflation, if it persists long enough, gets generalised. This has happened, as evidenced by inflation in manufacturing prices rising from 5.3 per cent in March 2010 to 8.2 per cent in November 2011. Thus, monetary policy and fiscal policy could contain the overall demand pressures,” Rangarajan stated.

“There are now definite signs of easing on the price front. The non-food manufacturing inflation has come down to below three per cent as of April 2013. This gives room for the monetary authorities to ease monetary policy. High growth does not warrant a higher level of inflation. In fact for sustained high growth, we need price stability as a pre-condition. We must keep inflationary expectations to the five per cent comfort zone,” he said.

Rangarajan said, “The two sectors which pose a major challenge are the farm economy and the power sector. The farm sector is constrained by the relatively low yield in major cereal crops and pulses as compared to other Asian economies, especially China. India is known for agricultural research. The results in terms of productivity gains must be taken to revitalise the traditional crops which vital to food security and farm income.”

“Shifts in demand has now come about with rising income and taste. Therefore, agricultural production must also respond to them. The last three years have clearly indicated decline in agricultural production causing distortions in the economy. It is, therefore, imperative that we aim at GDP originating from agriculture and allied activities growing at four per cent per annum,” he stated.

Rangarajan said, “In many ways, the coming decade will be crucial for India. If India grows at eight to nine per cent per annum, it is estimated that the per capita gross domestic product (GDP) will increase from the current $1,600 to $ 8,000-10,000 by 2025. It will transit from being a low-income to a middle-income country. There is a need to overcome the low growth phase as quickly as possible.”

“A number of schemes aimed at growth include the employment guarantee scheme, universalisation of education, expansion of rural health, and food security. These programmes have made a substantial demand on public expenditure which is only because of the strong growth that facilitated increasing resources by the government,” he said.

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