INDIA BUSINESS WORLD - FEBRUARY 2007
The Month that was ...

FOOD PRICES MAY NOT BE ONLY TRIGGER FOR SOARING INFLATION

YOU may believe food is squarely to blame for inflation. But the truth is inflation has jumped between November and February even as food prices have tumbled. Prices of most daily food items, except fruit and some vegetables, are now substantially lower than four months ago. So though the government is focusing chiefly on food prices, the real cause for inflation could well lie elsewhere.

The wholesale prices of most food items in the consumer's basket have dropped up to 20% since November. A quick comparison of wholesale spot market prices polled by Ncdex between mid-November and mid-February is sufficient.

Wheat prices have dropped from Rs 11.50/kg to Rs 9.50/kg, chana from Rs 32.00/kg to Rs 23/kg, urad from Rs 40/kg to Rs 28/kg, sugar from Rs 19/kg to Rs 14.50/kg, corn from Rs 8.50/kg to Rs 7.80/kg and cooking oil from Rs 47.50/kg to Rs 43.50/kg. Even onions have dropped to Rs 8.80/kg in Maharashtra's mandis, and rice is steady. However, inflation, which in November was 5.3%, has now moved up to 6.63%.

Even retailers are no longer charging huge mark-ups as suspected by the government. Prices in Delhi markets, tracked by the ministry of food, show that the trend is steady to bearish. This is one reason why measures such as stock limits and tightening of credit lines are not producing the desired results. The only crunch has come in the case of foods such as meat, milk, eggs and fruit, where higher cost of animal feed and poor harvests have pushed up consumer prices. However, once corn prices go down and vegetable harvests start coming in, prices are likely to cool normally.

Ironically, since the government is focused mainly on food prices, the biggest impact has been on the rates of return for small farmers. They are being forced to sell their produce at below MSP because the market price is suffering from the twin pressures of harvest and government intervention.

The figures show that instead of food, the real cause of inflation may lie elsewhere. The government perhaps needs to tackle the problem of steel and cement prices more aggressively.