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The agflationary threat

india Updated: Mar 12, 2008 21:00 IST

The recent feel-good budget is in danger of being neutralised by the threat of inflation. Global oil prices have zoomed to $ 109 a barrel. While consumers are insulated from their full impact, they are more affected by rising food prices. With wholesale prices scaling the 5 per cent mark for the first time in nine months, the prospect of agflation — to borrow a term of Merrill Lynch that captures the phenomenon of food prices forcing up overall price levels — casts a troubled shadow over the Indian economy. Rising prices are bad news for the middle-class. They are also a ‘tax on the poor’ as food consumption accounts for a large share of their meagre budgets and dearer prices of rice, wheat and vegetables drastically erode their standards of living. What is worrisome from the government’s standpoint is that short-term remedies to import cheaper food from the world market are not a feasible option as global prices rule at all-time highs. Wheat prices are up by 88 per cent since April 2007. Rice prices, too, have surged to 20-year highs.

The basic point to recognise is that this agflationary threat will not go away unless the neglect of crisis-ridden agrarian India is reversed. Economists attribute the rising food prices to demand-supply mismatches. But how to address the problem of shrinking food supplies? Since the 1990s, the rate of growth of foodgrains production decelerated to 1.2 per cent when population grew by 1.9 per cent, resulting in a decline in per head availability of cereals and pulses. From an earlier situation of self-sufficiency, India is now an importer of costlier food. This lost ground must be recovered by decisive policy interventions to place agriculture on a sounder technological footing. Stepping up investment in irrigation is imperative to reduce dependence on the monsoon. More remunerative prices are necessary to neutralise soaring costs of cultivation. In the interim, reform of the leaky public distribution system must assume a top priority to insulate the poor from the tax of rising agflation.