Column: Bringing food inflation below 6%

Dec 25 2013, 05:55 IST
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SummaryContain fiscal deficit aggressively, liquidate grain stocks boldly, and de-list fruits and vegetables from APMC Act

The double-digit food inflation remains stubbornly high, causing anguish amongst people and unease amongst policymakers and analysts. This year, in particular, vegetables, spearheaded by onions, went through the roof. And the second spoiler was cereals’ inflation. Both can be halved, and overall food inflation can be contained within 6% in the next 3-6 months, if we do the following two things aggressively.

First, open up the gates of FCI for anyone to pick up any amount of wheat at R1,400/quintal and rice at R2,000/quintal from any state godown, wherever it is available across India, no questions asked. This will immediately bring down the cereals’ inflation to less than 5%, and help the government to liquidate at least 5-10 million tonnes (mt) of cereals from a surplus stock of at least 20 mt kept in government godowns without serving much purpose. It will also save the government from high carrying-cost of these stocks. Second, at least in UPA-ruled states, announce that fruits and vegetables are de-listed from the APMC Acts. This would mean that anyone can buy fruits and vegetables directly from the farmers, without any license, commissions and market fees, and can sell to anyone. This will have the salutary effect akin to de-licensing the industry in the early days of economic reforms. APMC markets have become places for high rent-seeking by a few license holders, in collusion with the system, and this nexus must be severed for larger public good.

These two measures can give quick results. But for a long-term solution to food inflation, we must have a better diagnosis of the problem over a somewhat longer period. Looking at it over the last 15 years, say since 1998-99 to 2013-14, we find that the average rate of food inflation during the NDA period (1998-99 to 2003-04) was 4%, which went up to 6% during UPA-1 (2004-05 to 2008-09) and surged to 10.5% during UPA-2 (2009-10 to 2013-14, as per data available till November 2013). So, the real problem emerged during the UPA-2 period. What went wrong?

Our econometric analysis of data reveals that three factors were primarily responsible for this:

(a) sharp hikes in fiscal deficit from 2008-09 onwards (by more than 100% in a single year over 2007-08);

(b) high global prices of food, which got triggered in 2007-08 and then later remained high backed by global ‘fiscal stimulus’, increased financialisation of commodity markets, especially in Chicago

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