“Turmoil in Middle East, ‘easy money' policy of developed nations will affect headline inflation”

The sharp rise in food prices inflation will remain a major cause of concern as inflationary pressures on the domestic front are likely to be exacerbated by higher levels of global commodity prices, the Economic Survey has said.

It also indicated that the political turmoil in the Middle East and the “easy money” policy being followed by developed nations trying to jump-start their own economies after the global recession of 2008-09 would have a bearing on headline inflation.

Core domestic inflation moved up in the current fiscal indicating that the inflation in food items might have spilled over into a more generalised phenomenon. Inflation in food articles remained in double digits for 76 weeks from June 5, 2009, it pointed out.

The Survey, tabled in Parliament on Friday, identified the main causes for the rising food inflation — global rise in food and energy prices; domestic supply-side constraints; and the increase in the purchasing power of the rural population on account of the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).

“Food inflation has remained stubbornly in double digits for over a year now, which has welfare costs,” the Survey observed. “It has been unexpectedly high in recent weeks driven by the surging prices of vegetables, fruits, dairy, oilseeds and spices.”

A popular explanation for the sudden rise in the prices of vegetables, spices, dairy and similar products was that the rising incomes in India were driving prices higher, as consumers were presumed to be shifting from low-value products to higher value ones, the Survey said.

While there was a sharp rise in the prices of onions, tomatoes, fruits, vegetables, eggs, meat and fish, the prices of foodgrains remained low on account of the good monsoon in 2010-11.

Underscoring the need to remain “cautious” and “prepared” to take proactive steps, the Survey projected that inflation would moderate in line with the monetary tightening measures taken by the Reserve Bank of India and other steps taken by the government to address the supply-side bottlenecks.

The steps taken during the year included a selective ban on exports and futures trading in foodgrains, zero duty import on select food items, and the distribution of imported pulses and edible oils through the public distribution system.

Quoting from a July 2010 study (Baffes and Haniotis), the Survey said that the 2006-07 price rise was due to the generalised commodity price rise, especially in oil, caused by a world awash with liquidity and a falling dollar.

It was not, as popular explanations said, because of the rising demand in emerging markets such as India and China, a shift to bio fuels, a trend rise, or as an impact of the vagaries of weather in Russia, Australia, Argentina, Indonesia or the United States.

Referring to the rise in onion prices, the Survey pointed out that a sudden spike during December 2010 was witnessed on account of damage to the crop. Inflation in the last financial year was mainly driven by high inflation in pulses, cereals and sugar prices due to a bad monsoon.

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