Prices will not come below 8% unless supply side issues are tackled or growth sinks to 6 %.
A group of economists feel there is every possibility that food inflation will hover around eight per cent in the near future, though it is down to a seven-week low of 7.61 per cent and the monsoon is expected to have a cooling impact on it.
They say it will not come much below eight per cent on a sustained basis, unless supply-side issues are tackled or economic growth crashes to six per cent.
Sen, who served as the chief statistician prior to his current job, said there were structural reasons for that, including a demand-supply mismatch. “Now, there will be a glut of sugar and cereals, but even then there is high inflation in vegetables, fruits, milk, meat, pulses and oilseeds. If the overall economic growth falls to six per cent, then it may come down,” he said.
It can be seen from the accompanying chart that food inflation was in a range of 7.47 per cent to 9.13 per cent in the one-and-a-half-months ended June 25.
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Anis Chakravarty, director with Deloitte Haskins & Sells, said food inflation had largely remained high over the past year due to supply-side impediments. “Post-harvest storage losses and multiple inventory points lead to leakages in the system, which need to be minimised. Unless farm-to-market mechanisms are improved on a sustainable basis, it is unlikely to moderate,” he said.
However, C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, does not agree that food inflation will hover around eight per cent in the near future. He said even with a high current growth rate, it was possible to bring down inflation. “I think if the economy is growing at 8-8.5 per cent, the inflation rate could be brought down. There are certain external factors like crude oil prices where we don’t have control. Barring that, inflation should be brought down from the current levels,” he said.
According to him, the overall inflation will come down when food inflation declines. “Manufactured inflation is also because of persistence of food inflation, as it feeds into the demand for higher inflation,” he explained.
He said food inflation would further moderate, depending on the monsoon. A recent report by an inter-ministerial group on inflation, headed by chief economic advisor Kaushik Basu, recommended opening of multi-brand retail to foreign direct investment (FDI), saying it would have a dampening impact on inflation.
However, Sen did not agree: “Even FDI in multi-retail will not solve problems because these chains will procure food items from mandis and not farmers. It will add another intermediary in the mandi.”
Crisil chief economist D K Joshi agreed with Sen’s views. He said high food inflation did not have a link with FDI in multi-brand retail, as issues affecting the rate of price rise in food items were different.
However, Chakravarty said, “In this regard (moderating food inflation), FDI in retail is expected to bring a certain level of efficiency to a largely unorganised sector.”