A substantial portion of food inflation stems from an increase in food production costs, primarily rural wage inflation-RBI

The best way to foster sustainable growth in the current situation, other than through developing the financial sector, is through monetary stability- by bringing down inflation over a reasonable period of time. More specifically, we intend to bring CPI inflation down to 8 percent by January 2015 and 6 percent by January 2016, said Dr. Raghuram Rajan, Governor, Reserve Bank of India at FIMMDA-PDAI Annual Conference 2014.

He further said a substantial portion of food inflation stems from an increase in food production costs, primarily rural wage inflation. Some of that is an increase in real wages, needed to attract labour to agriculture, away from construction, education, household work, or MGNREGA. If, however, wages elsewhere also go up, the necessary shift in relative wages to keep agricultural work attractive will not take place, and we will continue to have a wage spiral. Also, some of the agricultural wage growth may be because of more liquidity flowing into rural areas. Somewhat paradoxically, to contain food inflation and get a strong increase in food production, we need to:

i. Contain the rise in wages elsewhere so that relative wages in agriculture can rise without too much overall increase in wages.

ii. Contain any unwarranted rise in rural wages as well as the rise in other agricultural input costs (though not through subsidies) so that the farmer gets a higher return.

iii. Allow food prices to be determined by the market and use minimum support prices to provide only a lower level of support so that production decisions do not get distorted or the price wage spiral accentuated. This means limiting the pace of MSP increases going forward.

iv. Reduce the wedge between what the farmer gets and what is paid by the household by reducing the role, number, and monopoly power of middlemen (amend APMC Acts), as well as by improving logistics.

v. Improve farm productivity through technology extension, irrigation, etc.

Meanwhile, among these points, monetary policy has a direct role in (i) and (ii) by slowing the demand for labour and by anchoring inflation expectations and thereby moderating wage bargaining. Indeed, with the slowdown in the in the urban economy, there is some evidence now that rural wage growth is slowing, though a recent pick up is of concern.

The RBI believes its fight against inflation will have traction, despite food being an important component of the CPI.

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