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Govt in dilemma as food inflation jumps

business Updated: Jun 10, 2011 01:58 IST
HT Correspondent

Government policy-makers are headed for a fresh dilemma, as there is no sign of respite on the inflation front. India's food inflation surged to a two-month high of 9.06% for the week-ended May 28, driven by costlier fruits, and protein-based items such as milk, egg, meat and fish.

That means prices are not under control despite a slew of fiscal and monetary measures and the Reserve Bank of India (RBI), due for a policy meeting on June 16, may have a bigger headache than it was expecting.

Food inflation was 8.06% in the previous week, but is set to rise further in the next few weeks following a possible hike in prices of diesel and cooking gas. And it does not help that global crude prices are surging again, while finance minister Pranab Mukherjee said on Wednesday that the government may miss its tax collection targets — implying a crunch on spending power.

High food and commodity prices are fanning prices of most manufactured goods and inflation of non-food articles has been in the range of 20-25% over the past many weeks.

Both the government and the RBI have acknowledged that underlying inflationary pressures have accentuated, even as risks to growth are emerging.

The RBI has raised the repo rate, the rate at which banks borrow from RBI, by nine times to in 13 months to 7.25% to cool prices.

Costlier money chokes demand for loans.

Experts expect the Reserve Bank of India to raise interest rates again in its mid-quarter review, despite signs of an industrial slowdown. India's manufacturing sector grew by 5.5% during January to March, the slowest in 18 months.

"In light of still-high WPI inflation and the incomplete adjustment in fuel prices, it is likely that the RBI will hike the repo rate by 0.25 percentage points,” Rajeev Malik, senior economist as broking and research firm CLSA, told Hindustan Times.

A lot will still depend on an adequate monsoon. The Met department has forecast a normal monsoon, crucial for the summer-sown crop that accounts for more than half of the country's annual food

A strong farm sector output is critical to bringing down food product inflation that is inching towards double digits and has spread on to "core inflation,” affecting prices of goods other than food and fuel.

"If monsoon is favourable, food prices will come down over the next 2-3 months. Overall inflation rate will come down slowly by October-end," Prime Minister's economic advisory council chairman C Rangarajan told reporters on Thursday.

"Once monsoon picture becomes clear, I expect decline in prices. We could see WPI (wholesale price inflation) at 6.5% by March-end," Rangarajan said.

India's farm sector expanded at 6.6 % during 2010-11 and the government is pinning its hopes on strong agriculture output for the second straight year to sustain the growth momentum in the broader economy and keep food prices in check as well.