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NDA government manages food prices better

india Updated: Jul 16, 2014 01:21 IST
Zia Haq
Modi government

A harbinger of ‘ache din’ promised by the Modi government could be just around the corner: easing food prices amid a looming drought. This has prompted analysts to wonder how prices have ended up lower at a time when they could have been even more sticky.

India’s wholesale inflation slowed to a four-month low of 5.43% in June. Food prices came in lower at 7.9%, compared to 9.3% in May. Retail prices too eased to 7.31%, their sharpest fall in 43 months.

“More importantly, the fall (in retail prices in June) was broad-based as inflation in all three components -- core (7.2% in June down from 7.9% in May), food (7.9% from 9.3%) and fuel (4.6% from 5.0%) -- moderated,” said Sonal Varma a research analyst with Nomura, a Japanese brokerage firm.

For the two-month-old NDA government, these record-low inflation figures mark an early victory over the price monster. To be sure, the NDA has had a better record at food management, keeping food inflation at just 1.8% in 2002 when it faced a drought year. By contrast, in 2009-10, when the UPA confronted a drought, food prices rose 15.3%.

Together, these trends represent the best bet for the Modi government to fix its biggest worry: the economy. Some quick policy decisions and strong administrative measures helped.

Unsure of the monsoon, the government released 5 million tonne of grains in the open market, along with a curb on farm exports, strong warning to hoarders and a lower increase in the support prices offered to farmers for their produce.

This stands in stark contrast to the UPA’s policy of sitting on huge grain stocks, while steeply hiking minimum support prices (MSP) of key staple crops. During its previous stint, the NDA government raised MSP by 30%, while the UPA raised it by 130%. According to an RBI study, a 10% MSP hike raises short-term wholesale inflation by 1 percentage point. The difference shows in the latest inflation figures.