New government will have to weather inflation

Dinesh Narayanan
the commodities price have gone high in last few years rapidly

the commodities price have gone high in last few years rapidly

A couple of years ago, Jasmine Whitbread, the CEO of Save the Children, told me in an interview that in Africa and Asia millions of children often go hungry for days. Then she gave me a startling insight – the children were starving not because food was unavailable but because it was unaffordable. People were already spending 80-90 per cent of their incomes on food and if prices rose any further, they just had to cut down.

Inflation bothers everyone. But for millions of poor, rising prices can become a matter of life and death. Price rise can fuel social unrest, revolutions even. A 2011 study by Marco Lagi, Karla Z. Bertrand and Yaneer Bar-Yam of the New England Complex Systems Institute found that the timing of violent protests in North Africa and Middle East in 2011 popularly known as the Arab Spring as well as earlier riots in 2008 coincided with big peaks in global food prices. More than 60 food riots occurred worldwide in 30 different countries in 2008. The study finds that riots were few in years that food prices remained low.

High prices of vegetables, especially onions, clearly played a big role in bringing down the BJP government headed by Sushma Swaraj in 1998 and installing Congress’ Sheila Dikshit in the chief minister’s chair in the Delhi assembly. Last December, voters booted her out after three successive terms. Though there were many issues that contributed to her loss, high inflation, especially of vegetable prices, was at the top with corruption.

Inflation is one of the key issues in the Lok Sabha elections as well. Price rise has certainly added fuel to the anti-Congress sentiment in the country. India has been experiencing high food inflation in the past few years as rising incomes and changing consumption habits influence supply and demand and consequently, prices. A 2012 working paper published by the Institute of Economic Growth suggests that the structure of demand is changing with rising income levels. The authors Pradeep Agarwal and Durairaj Kumarasamy say that demand for fruits, vegetable, cooking oils, dairy products, and meat will increase by 60–75 per cent over the next 10 years, while demand for cereals will increase only 10 per cent. Demand for pulses will even decline slightly.

While the ruling Congress Party is claiming to have controlled inflation, its rivals are promising to keep the demon quiet. So far the only people fighting inflation appear to be the folks at the Reserve Bank of India. But in a country like India where a large part of the economy is informal and monetary policy takes months to percolate down, the central bank has limited capability to fight inflation alone. RBI Governor Raghuram Rajan told analysts in March that he hoped the new budget the next government presents will have enough to attack inflation in the long term. “For example, if the government is more circumspect on agricultural support prices as they have been last year, that would help mute food price inflation,’’ Rajan said. The RBI hopes to bring down the Consumer Price Index to 6 per cent in two years. Many economists and policy analysts have pointed at the massive supply side constraints that prevent from effectively attacking inflation. This year, climate change may add to the woes.

The Intergovernmental Panel on Climate Change (IPCC) predicted in March that Asian countries will face extreme weather events by the middle of the century and will experience severe stress on water and food grains. It has specifically pointed out that weather change will reduce wheat yields in India and China.

Rogue weather has already wreaked havoc on farmlands. Unseasonal rain and hail storms destroyed standing crops in millions of hectares in most states of northern and central India. Crops, including ready-to-harvest wheat, potato, gram, pulses, vegetables and fruits, were flattened and the estimated damage runs into thousands of crores.

While it was raining cats and dogs in the north, the southern parts of the country were reeling under a heat wave. Cash crops in northern Kerala are dying as water is drying up.

Weather watchers are predicting an unusually warm Pacific Ocean by the middle of the year could spawn El Nino conditions affecting monsoon rainfall in India and elsewhere in Asia. That could spoil India’s summer sowing season.

While the consumer price index has been steadily coming down over the past few weeks mainly because of lower food prices, a disruption in agriculture could set the clock right back. Unlike some previous years when India managed to import wheat, onions and sugar when its own production fell short, this year might be different. Changing weather patterns are likely to affect farming across the world which in turn is likely to affect availability of many commodities in the international markets.

Already prices of onions have started rising with one report suggesting they are up 40 per cent in the country’s largest onion wholesale market at Lasangaon in Maharashtra. The new government that takes office in Delhi this summer will likely face the heat of prices within weeks. And there won’t be any easy way out.

Dinesh Narayanan is an independent journalist. He is a former senior editor of Forbes India magazine.