India's food crisis (Part-2)

This post is a continuation of my first article, "India's food crisis", since the situation in terms of food price inflation has evolved further and needs a newer look on the case. The food price inflation has reached 19.83% in the 12 months to the December 19, 2009. We have to remember that the oil prices were down below normal levels this time last year. So the food price inflation of 19.83% looks very high and considering that this is only a WPI measured inflation, the prices of the food products in the retail market will be much higher. In a country where almost half the population live on marginal incomes this situation is totally unacceptable. But nothing could/should be done on the monetary policy side to control this food price inflation. I agree that it is a genuine concern that this increase in food prices might slip into broader inflation. But we have to keep in mind that this food price inflation is due to a shortage in supply and is sector-specific. The only way to reduce price rise is by increasing supply and the way to increase supply is through imports and offloading some food stocks from the storage. I was assuming that a decent proportion of price rise of food products was contributed by speculation. So I was wondering if imports would increase the price of food products in the retail market above what could be achieved by controlling speculation. But the situation looks like the food price inflation is shooting above acceptable levels of real food price inflation minus speculation. I know that the Government of India was in direct talks with other governments to import essential food items but I am not aware of the results of the actions by the government. In any case, it is time to import food items and offload some amount of food stocks in storage. I have been hearing about the success of winter crops harvest. So a small amount of imports of essential food items along with offloading a measured amount of food stocks from the storage should reduce the food price inflation for few months before we come across the next monsoon season. And if the next monsoon season is a success then the government can offload a further measured amount of food stocks from the storage without importing any further to keep a tight lid on the food prices till we reach the next harvest season. Currently if the import costs are very high then the government might be forced to sell the food products at more-than-expected subsidized rates which may increase the government's deficit. But that's fine, the government must go ahead and import food for the sake of preventing this sector specific inflation from falling into the broader inflation. So yes I think it is time for the government to take some of the above mentioned measures (if they have not started already).

Again, no amount of monetary tightening should be done now to control food price inflation or in the fear to control broader inflation. Again, this is sector specific and is due to shortage in supply and is not because of excess demand or excess liquidity in the system. So all the great personalities talking about exiting monetary stimulus, I kindly urge them to think again.

By the way, considering the benefit of the people of India, I am confused as to why some top government officials OTHER than RBI Governor, Deputy Governors, Prime Minister, Finance Minister and Finance Secretary are even talking about monetary policies. Some are not just talking but are hinting and strongly predicting about monetary policies. Those officials will do a great favor by not talking about monetary policies. I hope they are aware that their on-the-run interviews in the media is unnecessarily hurting the financial markets and I also hope that the Indian media will in the future better know about whom to ask what questions.

Update 1:
Update Date : January 13, 2010
Good News - as per the news on January 13, 2010 the Agriculture Minister of India after a cabinet-level meeting today announced the release of 3 million tons of wheat and rice from storage into open markets. But he said that the Govt. has decided not to import rice.
Well, I am atleast glad that the release of wheat and rice is done. This should ease the price to a considerable level. The enormously high cost of sugar in recent weeks was an area of concern during the meeting and some political problems in one of India's state (which has not processed raw sugar that's imported and is sitting idle in its ports due to local political problems)was quoted as a reason and some measures have been taken to address this issue. I am not going into this political issue now but one thing that I can say is the - it is festival time in many parts of South India. And one of the highlights of this festival is consuming more sugarcane and making sweets at home. So this would have shooted up the prices of sugar. Once the festival ends this week, the demand should go down and I am expecting the sugar prices to come down a little. And the other measures taken by the government should reduce the price of sugar further more. So it looks like we are in a good situation. The food price inflation in December was near 20% and I am expecting it to come down a little in the coming weeks. I will keep this case posted.

Update 2:
Update Date : February 11, 2010
Food-inflation was 17.94% during the week that ended January 30, up from 17.56% in the previous week.