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Protect manufacturers from inflation: PMEAC PDF Print
Written by Mandakini Raina   
Friday, 04 December 2009 03:31
The answer to India’s food price issue is simple. It’s import. There is no other way. Tightening of the monetary policy by the RBI will not have that much of an impact
 
On a day when official data put food inflation for the week ended November 21 at 17.47 per cent, the prime minister’s economic advisory council (PMEAC) called for stricter money policy to contain any spillover to the manufacturing sector. Food price inflation rose from 10.75 per cent in the corresponding period in the previous financial year.

“Food-price inflation is a worry,” said PMEAC chairman C Rangarajan, minutes before the release of the wholesale price index on Thursday. “The persistence of high food-price inflation has a tendency to spread to manufacturing inflation. That may require money policy action,” he said.

The tightening of money policy could mean the Reserve Bank of India taking steps to raise interest rates and take out excess cash from the banking system.

Rangarajan voiced his concern a day after the PMEAC revised its growth forecast for the Indian economy from 6.5 per cent to 7 per cent due to the good showing in the manufacturing and services sector.

He, however, said the PM’s advisory council will need to assess the impact of agricultural growth before taking the final call on revising the GDP growth outlook.

For the second quarter, the economy grew by 7.9 per cent. The performance of the farm sector, however, is expected to bring down overall growth rate in the third quarter when the full impact of the worst drought since 1972 would be felt.

The sharp increase in food price inflation was on account of rising prices of rice, wheat, pulses, vegetables, onions and fruits. The price of potatoes, however, has climbed down for a few weeks. The price increase, which stood at 111.35 per cent in the previous week, stood at 94.17 per cent for November 21.

The money policy, which experts and economists expect the RBI to tighten in January, might just not be the answer to keeping food prices in check. While primary article inflation is on expected lines and would remain in the 10 to 13 per cent range, head of economics at research firm Indicus Analytics Laveesh Bhandari said money policy alone couldn’t achieve anything.

“The answer to India’s food price issue is simple. It’s import. There is no other way. Tightening of the monetary policy by the RBI will not have that much of an impact,” said Bhandari.

Last month, the finance minister told parliament that India may import rice although it had surplus stock in godowns, but did not specify what quantity or when the imports were going to be made.

Chief economist of Bank of Baroda Rupa Rege Nitsure believes that the present situation is a challenging one for the policy makers since the economic data is still quite mixed.

“While Q2 GDP numbers are robust, the figures on indirect tax revenue for Apr-Oct, corporate sales growth in H1 is quite dismal. Exports are still under pressure and bank credit growth is anaemic. Any tightening by way of policy rate hikes before April 2010 will be premature and adversely affect the growth,” said Nitsure.

In fact, Nitsure maintained that high food prices would create pressure for wages to go up in the organised manufacturing sector sooner than later and result in a wage-price spiral. She forecast the headline inflation to be closer to 8 per cent on a year-on-year basis led by food prices and low statistical base.

Icra expects RBI to commence its monetary tightening by early 2010, but also expects to see no relief on food price inflation directly.

“While monetary tightening would not impact food price inflation directly, as the latter is driven by supply side factors, it would have an impact on the building up of inflationary expectations, and contain the spillover of food inflation into wages and thereby the rest of the economy,” Icra’s economist Aditi Nayar said.