Inflation has been spooking everyone - from housewives to prime minister and from retail investors to FIIs. Two numbers have been doing the rounds - the headline (WPI) inflation and the food inflation with the latter taking most of the limelight.
RBI duly increased interest rates in its latest monetary policy - thankfully by only 25 bps. I wonder if it is doing so out of ideological belief or out of the need to be seen doing something. Here's why I wonder so.
Data on the finance ministry website shows the nominal and real growth in three sectors of the economy.
Nominal Real Inflation
Agriculture 25.4% 4.4% ~21%
Industry 15.5% 8.9% ~6%
Services 18.7% 9.8% ~9%
This means that industrial output and services have become costlier by a much more modest 6-9%. Food has been the only source of sustained high inflation. In this scenario, how is interest rate likely to reduce it is difficult to see. It will of course bring about a reduction through further decrease in industry and services inflation. However, I think the agricultural inflation is largely immune to interest rates and will continue to remain stubbornly high unless some other policies work or we get lucky. The sad part of this story is that monetary tightening will end up hurting growth anyway.
What can the policy makers do to contain food inflation in a targeted manner? Tax-sops? Imports? Increasing supply through Food Corporation Stock?
There is a much neglected another angle to this story - full of political implications. High food inflation in turn is income re-distributive - it takes money from rest of the agents in the economy and puts it in the hands of the farmers. I have no value judgment in the matter. It is noteworthy though. And this can be helpful to create a positive sentiment amongst farmers before the near term elections after all.
RBI duly increased interest rates in its latest monetary policy - thankfully by only 25 bps. I wonder if it is doing so out of ideological belief or out of the need to be seen doing something. Here's why I wonder so.
Data on the finance ministry website shows the nominal and real growth in three sectors of the economy.
Nominal Real Inflation
Agriculture 25.4% 4.4% ~21%
Industry 15.5% 8.9% ~6%
Services 18.7% 9.8% ~9%
This means that industrial output and services have become costlier by a much more modest 6-9%. Food has been the only source of sustained high inflation. In this scenario, how is interest rate likely to reduce it is difficult to see. It will of course bring about a reduction through further decrease in industry and services inflation. However, I think the agricultural inflation is largely immune to interest rates and will continue to remain stubbornly high unless some other policies work or we get lucky. The sad part of this story is that monetary tightening will end up hurting growth anyway.
What can the policy makers do to contain food inflation in a targeted manner? Tax-sops? Imports? Increasing supply through Food Corporation Stock?
There is a much neglected another angle to this story - full of political implications. High food inflation in turn is income re-distributive - it takes money from rest of the agents in the economy and puts it in the hands of the farmers. I have no value judgment in the matter. It is noteworthy though. And this can be helpful to create a positive sentiment amongst farmers before the near term elections after all.
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