Vegetable prices declining but crude needs to be watched: EAC

Vegetable prices have shown a declining trend In the last four weeks, but crude prices in global markets need to be watched, said C Rangarajan, chairman, Economic Advisory Council to the Prime Minister.

He said the threshold level of inflation, which shows the acceptable rise in prices, is regarded as four per cent, according to Chakravarty committee. However, in the Indian context, an inflation rate around five to six per cent may be acceptable, he said, in his address to a seminar organised by Reserve Bank Staff College and the Madras School of Economics here.

Rangarajan said the government is committed to maintain inflation at a low level by use of policy instruments including intervention in the grain market, fiscal and monetary policy, to bring down the current inflation and re-anchor inflationary expectations to the four to five per cent comfort zone.

“While the food price inflation of last year was triggered by the rise in food grains prices, this year it has been triggered by the rise in the prices of vegetables, fruits, eggs, meat and fish,” said Rangrajan.

“It is argued by some that high growth warrants high inflation. The extraordinary high level of inflation seen in the last two years is due to certain severe supply constraints, particularly of agriculture products,” he added.

Giving an overview of the recent trends in inflation, he said in 2009-10, the food grains production declined by 11 million tonnes due to the deficient monsoon. This triggered inflation as measured by the wholesale price index to touch the peak of 11 per cent in April 2010.

The inflation started moderating in 2010-11, as expected, but only till November 2010. However, prices started rising after that, and as of February, year-on-year inflation was 8.3 per cent owing to the increase in vegetable prices due to late rains affecting supply of some vegetables including onion, he explained.

High growth in economy does not warrant a higher level of inflation, and the past experience is that the inflation in food grains and vegetables has resulted in inflation across other sectors, he said. For instance, in the three years, from 2005-06 to 2007-08 when the Gross Domestic Product (GDP) growth rate exceeded nine per cent, inflation rate was much lower.

The behaviour of prices also depends on the rate of increase in money supply. The one situation in which a high growth rate may result in higher inflation is when the growth rate exceeds potential capacity of the economy, in a situation called overheating, he added.

Indian economy has not been affected by overheating, since the investment of the economy now exceeds 36 per cent and even with an incremental capital-output ratio of 4:1, the country should be able to grow comfortably at nine per cent.