The Consumer Price Index (CPI) data released by the government for May 2014 has brought a small sigh of relief to policymakers in the sense that the rate of food price inflation (CFPI) has not accelerated. But it still continues to be high at 9.56% (May 2014 over May 2013). For all of FY14, food inflation (CFPI) remained at 11.3%, which was only a notch lower than 12.2% registered in FY13, but higher than the 10.9% in FY12. The three year average rate of food inflation has been 11.5%, which has been a killer, and UPA II had to pay a heavy price for that electorally.
It is natural for the Modi government to learn a lesson from this and try and beat food inflation down to below 5%, lest it erodes the high hopes people have put in the new government. But it is going to be a daunting task, given that the current year rainfall is likely to be 7% below normal and the El Niño hitting sometime in late July-early August. All this may worsen the situation on food price front. The prime minister, thus, rightly met with the relevant ministries earlier this month to review the government’s preparedness to deal with sub-normal rainfall. Both, the finance minister and RBI Governor, are also well aware that they need to keep a lid on high fiscal deficit and overflow of money supply in the market to contain inflation. But food inflation is a little tricky, and high interest rates may not help much in that direction.
Before we put forth our suggestions on what best can be done to tame food inflation, it would be wise to understand its structure and complexity a little better, especially over the last say three years. Only a better diagnostics of this problem can lead to some sustainable solutions.
During FY12 to FY14, the worst performance, in terms of prices of food items, was that of vegetables, with an average annual rate of inflation of 17.4%, followed by fruits at 15.3%. Eggs, fish, meat, milk and milk products, and oils and fats, all hover around 13%, cereals at 9.9%, pulses at 5.6% and the lowest rate of inflation is registered in sugar at 2.9%.
Fruits and vegetables (F&V), eggs, fish and meat (EFM), milk and milk products (MMP) are all highly perishable, high-value agri-products (HVA) and more nutritious, whose demand grows with