The significant risk to the India story at this juncture is inflation, pushed along by food prices. Wholesale food inflation rose an alarming 2 percentage points a week to 17.47 per cent in November, triggering comments from the Prime Minister’s economic advisory committee as well as the Organisation for Economic Cooperation and Development that it could raise non-food inflation — a benign 2.2 per cent at the moment — unless the central bank begins tightening its monetary policy. The Reserve Bank of India, too, has been flagging broader inflationary expectations for quite a while. Although monetary policy is a blunt instrument to tackle a supply shock with, the RBI’s hawkish stance on prices can only stiffen as the knock-on effect works its way into core inflation (minus food and energy). The central bank is most likely to drain some of the excess liquidity in the system before it starts raising interest rates.
The current orthodoxy does not countenance any threat to India’s growth momentum. Depending on how you choose to measure it, food makes up from 25 per cent to 65 per cent of the weight in the several price indices the government puts out. Persistently high food inflation is squeezing household budgets and, therefore, consumption. The supply-side policy response is fairly well established. The Centre draws down grain stocks to feed the poor, sells some of it in the open market to keep a lid on prices, lowers taxes on food imports, pays more for farm produce, and ensures availability of power for irrigation. All of this, however, is predicated on states ensuring bottlenecks are cleared in the public distribution of food. There appears to be evidence that last-mile problems linger, playing into the hands of speculators.
Drought management capabilities in India lack the ability to tackle successive ones. The prospect of another low harvest next year poses a bigger threat than the likelihood of a double-dip recession in the West. Interest rates can do little to contain the demand for food and inflation can only rise as the government replenishes its granaries at higher prices. Mitigation, not management, is what should shape India’s approach to drought. That would involve technology upgrades, a shift towards drought-resistant seeds, and rehabilitation of water delivery systems.