Address supply side on food: World Bank

Demand-side control cannot be an answer beyond a point to India’s persistently high food price inflation, the World Bank said on Monday.

Consumer price-based food inflation in India has been at 10-20 per cent for quite a long while, noted its report on ‘Food inflation in South Asia’.

The Bank’s chief economist for the region, Kalpana Kochhar, said controlling inflation in India was a difficult job for the Reserve Bank of India in its current context. "The RBI has an extremely difficult job right now...RBI has to respond to food inflation because it spills over very quickly to inflationary expectations," she said.

To a query, she said foreign direct investment in multi-brand retail may help address the problem but only to an extent — unless complemented by other supply-side initiatives.

In the end, it is supply-side measures that will have to be taken to contain inflation, she said. Adding that two and a half years of persistently high food inflation in India is a pretty long time.

The report named Gujarat as the success story on the agricultural front, as farm output has grown by almost 10 per cent per year over the past decade, more than three times the all-India figure.

Though poor households still consume mainly grains, food inflation in India is now not much driven by cereals but by fruits, vegetables, milk, eggs, meat and fish, a point made by the Reserve Bank as well.

Even then agriculture policy in India narrowly supports cereal production, while inflation is driven by other agricultural commodity prices, the presentation said.

Also, input subsidies like fertiliser in some cases has led to declining productivity, it added. "Fiscal costs divert resources from other interventions which have potentially higher impact on agricultural productivity, such as agricultural research, education and rural roads and water management," it added.

Consumer price-based food inflation in India has been pretty stable, albeit at high levels of 10-20 per cent, compared to fluctuations in the international rate of price rise in these items since 2007. This makes the job of Indian authorities tougher than other developing countries, the World Bank said on Monday.

"While international prices showed large swings over the last three years, prices in India have been much more stable," the report said. For comparison, it took food inflation as provided by the consumer price index for industrial workers in the case of India and the food price index as provided by the UN’s Food and Agriculture Organisation in the case of international prices.

When asked whether this makes the job of Indian authorities easier or tougher than other developing countries, World Bank India senior economist Ulrich Bartsch said it would be a much more difficult task because Indian authorities cannot pass the buck to the international price situation.

"Governments in Afghanistan or Sri Lanka can say that prices of food items are rising because of the international price situation, but Indian authorities cannot. It makes the job of Indian authorities tougher," he added.

The presentation quoted a study by Planning Commission member Abhijit Sen and economist Himanshu to point out that household consumption through the public distribution system constituted just 57.2 per cent of total grain deliveries to the PDS during 2007-08, signifying huge leakage through ration shops.