It’s difficult to envy the Reserve Bank of India. The central bank has wielded its sharp interest-rate tool a dozen times in the last 19 months, and a blunt one (raising the cash reserve ratio) three months before the hiking spree started in March 2010 — all classical monetary moves — to moderate, if not feeble, effect. To boot, it does not have an effective weapon against rising purchasing power and consumption. For that matter, neither does a crisis-embroiled government. Ergo, food inflation keeps rising — it bounded up to 10.60% for the week ended October 8 year on year from 9.32% in the week before as vegetables, fruits, milk and protein-based items turned costlier. “Seasonal and structural factors are contributing to the hike in food inflation. Government policies are only boosting rural income, not productivity,” points out A Prasanna, chief economist, ICICI Securities Primary Dealership. He was referring to stuff like NREGA, which guarantees 100 days of work to those in hinterland. So, effective or not, the market expects the RBI to hike the repo rate — the rate at which banks borrow from it— by 25 basis points next Tuesday, but the thirteenth such effort may end up as another tokenism. “That’s because food inflation is driven by factors beyond the control of the RBI. Nobody borrows money to eat food, so it cannot be controlled by the apex bank,” said Madan Sabnavis, chief economist, CARE Ratings. But, at the same time, the cost of producing food has been rising as interest rates harden. There is clearly monumental failure to address the supply-side constraints, say experts. Says Anubhuti Sahay, economist, Standard Chartered Bank: “The government needs to invest more in agriculture, irrigation and other infrastructure. Rural demand is picking up because of government’s social security schemes.” Food policy analyst Devinder Sharma said there is no mechanism to check transactions between wholesalers and retailers. “The price of agricultural commodities doubles or rises even more there. Unfortunately, the government is not taking any step to reduce this,” says Sharma. O P Bhatt, former chairman of the State Bank of India, has a different take on the situation. Demand for food is greater in India compared with other countries, he says, because there are millions of poor who have one or one-and-a-half square meals a day and others who consume more. “We have 100-200 million who are very poor. The demand for food is coming from all these sections of population, contributing to food inflation,” he says. So it’s a sign of economic prosperity and the benign economic theory holds true, where conditions prevailing in the economy tend to exert a beneficial or favourable influence, he says.
DNA
