Prices of many food commodities are unlikely to come down in the current financial year, as record-high government procurement prices announced this year would keep these essential commodities dearer.
Prices of food articles, as captured by the wholesale price index (WPI), have increased by 3.62 percentage points to touch 10.46 per cent in the period between August 2 and December 13 this year. Headline inflation during this period declined from a 13-year record high of 12.9 per cent to 6.61 per cent.
“The increase in minimum support price (MSP) of many crops may keep the food inflation from falling in the current year,” said the finance ministry in the mid-year review.
MSP, which is determined by the government to protect the farmers’ earnings, has increased by 15-40 per cent in the current fiscal for three major categories — wheat, paddy and coarse grains. The latest hike in MSP announced during this election year is the largest in the last four years.
As per data provided by the agriculture ministry, the MSP announced in marketing season 2008-09 accounted for 70-80 per cent of the increase in prices for wheat, paddy and coarse grains in the last four financial years starting from 2005-06.
For example, the MSP for wheat was increased by Rs 250 per quintal in 2008-09 to Rs 1,000 per quintal. However, in the previous three financial years, the increase was only Rs 110 per quintal (refer table). At the same time, international price of wheat declined by 46 per cent in the current calendar year.
“Food inflation would remain sticky because of higher MSP,” said Indranil Pan, chief economist with Kotak Mahindra Bank, adding MSP is the primary reason behind consumer price inflation going up in the last four months. Economists refer to prices being sticky when it does not change to movements in demand and supply.
Unlike WPI that comes with a time lag of two weeks, the consumer price inflation comes with a much larger time lag. Hence, policymakers and forecasters look for WPI numbers more closely than consumer price index.
