Raise the food subsidy

The Wholesale Price Index numbers for the week ending March 8, released last week, showed that the inflation rate surged almost a percentage point compared to the previous week. It surpassed all expectations (or fears) to touch 5.92 per cent, a benchmark reminiscent of a year ago, when food prices were running rampant. As it happens, the same set of factors that caused so much disruption last year are responsible for the rather discomforting situation now. Food prices are very much at the heart of the problem, with the prices of pulses, in particular, accelerating rapidly in recent weeks. In fact, the prices of staple pulses like arhar and moong have increased by as much as 3 per cent over just one week, gram also by 3 per cent, and masur and urad by 2 per cent, suggesting that the relief provided by a good monsoon last year is coming to an end and prices are likely to be firm until the next harvest comes in, later in the year.

The other problem area is oilseeds. Reinforced by surging global prices of the major edible oils, domestic prices have increased sharply. The prices of cottonseed oil, for example, have gone up by an astonishing 10 per cent in one week, while coconut and mustard oil are up 3 per cent. Imported edible oil prices have increased by 4 per cent. In the context of slowing GDP growth, with household incomes about to grow more slowly, these developments do not bode well for the average consumer and, by extension, the ruling coalition in the run-up to the general elections. Internationally, wheat and rice prices too are on the rise, and maize has already reached record levels. If domestic production falls short in the staples, then imports will be an expensive proposition "" and politically volatile since it will be said that the government is paying higher prices to farmers in other countries than to those in India.

The inflationary pressure is not confined to food prices. The prices of several categories of manufactured goods have also shown significant increases. Metal prices have gone up by almost 7 per cent over the previous week, boosted by a 20-30 per cent weekly increase in the prices of steel products. Energy prices too have contributed, reflecting steady increases in the prices of petroleum distillates which are not controlled by the government. Normally, increases in the prices of manufactured goods are seen as a reflection of "demand-pull" inflation, which indicates that the economy is overheating. The fact that some prices continue to increase so sharply in the face of both global and domestic growth slowdowns highlights the global price pressures in commodities. This tide may eventually be reversed as the global slowdown intensifies, but there are no signs of this as yet.

What is the appropriate policy response in this situation? The central bank is hamstrung by the fact that growth and inflation indicators are so clearly moving in opposite directions. It needs to lower interest rates to stimulate growth, but is wary of doing so because of the inflation problem. The government can contribute by lowering indirect tax rates, which it did in the form of lower customs duties for edible oils last week, but this is at odds with maintaining fiscal discipline, particularly when GDP growth is itself moderating. Positive supply responses in both agriculture and commodities need to be encouraged, of course, but they will not address the immediate problem. Unfortunately for policymakers, there are no text-book solutions. Something has to give; under the circumstances, the only option is a bit of fiscal laxity in the form of larger food subsidies, for transfer payments offer the least painful solution.