The fever has broken in food inflation. The food price index rose 16.30 per cent in the year to March 6, lower than 17.81 per cent in the previous week and off the recent high of 19.95 per cent. The softening is set to persist as the benign food inflation of a year ago reaches a tipping point and a high base effect kicks in. If food prices stay at current levels — and there are indications that a strong winter crop has stabilised prices since February — food inflation should decline by over a percentage point each in subsequent weeks. This gives the government leeway to consider raising the price of rationed food to match the support prices it pays farmers for grain. The subsidy has almost tripled since 2002 when prices were last raised for food sold through the public distribution system.
The wild card in food inflation is this year’s monsoon, which, if truant, could reverse the nascent trend. Buffer stocks saw us through the 22 per cent decline in rainfall last year, but two failed summer crops in succession would be disastrous when cereal prices worldwide are higher abroad than at home. The official forecast is due in a few days, but early predictions suggest El Nino — a weather pattern that warms up the Pacific Ocean and weakens the Indian monsoon —should fade by July. This may delay rains, but ought not to affect precipitation overall. India went into the 2009 drought with a smaller grain stockpile than in 2002, the previous drought year, limiting the government’s options to tame prices last year. With a regular crop in, the granaries will have to start restocking, exerting price pressure in tandem with the pace.
The battle with the price line has now moved to a new theatre of operations. Core inflation — minus volatile energy and food prices — has climbed from zero last July to 7.4 per cent in February. Higher taxes and energy costs are working their way through the system and could push wholesale inflation up by nearly 2 percentage points. Here, however, the government is on firmer ground — it can work the policy levers to reign in non-food inflation. India has gingerly embarked on a demand compression cycle; its progress will depend on the strength of the recovery. If, in the process, the bigger lessons from our rising food insecurity are lost, the next drought could cost us more.