The Reserve Bank of India (RBI) on Tuesday said that growth in agriculture sector and more efficient distribution of foodgrains are paramount factors to contain the rising inflation as well as inflationary pressure.
“Repeated supply (foodgrains) shocks pose a constant challenge to ensuring a low inflation regime in India, which is necessary for achieving inclusive high growth. A medium-term approach is required to augment the supply by addressing structural supply constraints, particularly in items of mass consumption,” RBI stated its Annual Report 2009-10. When the inflationary pressures are dominated by adverse supply shocks, “monetary policy could be less effective in containing price pressures,” it added.
While the performance of agriculture sector in 2009-10, in the face of a deficient monsoon, has been better than in the previous drought episodes, concerns still remain over the ability to withstand successive years of drought. The average growth rate of foodgrains production at 1.6 per cent during 1990-2010 has trailed behind the average population growth of 1.9 per cent.
“Agricultural productivity requires particular attention, since demand-supply gaps in basic items such as pulses, oilseeds, vegetables and dairy products are growing, and with rising income and growth of the middle-class, demand for such items will exhibit sustained increase. There are certain other items where the supply situation is also highly volatile, as has been the case with sugar in recent periods,” it noted.
One of the objectives of maintaining buffer stocks is to stabilise prices when output of basic consumption items decline. During 2009-10, however, stocks of wheat and rice actually increased even when retail prices were high and domestic foodgrain production declined.
“While the critical significance of food security suggests the need for continuation of the policy of maintaining adequate buffer stocks, their timely use through more efficient distribution during periods of adverse shocks to farm output should receive greater policy attention. It has to be recognised that to meet the demand of a 1.2 billion population, India cannot depend on imports on a sustained basis, since imports at high cost, besides not helping in containing inflation, will also potentially dilute efforts that may have to be put in place to address the domestic supply constraints,” it said.
The RBI also voiced its concern over commodity futures market. “Despite the persisting ambiguity about the relationship between futures market activities and spot prices of commodities, activities in the futures market need to be better monitored, given the possible role this market may have for the overall inflation conditions,” RBI said.
Increases in food and essential commodity prices in India in 2009-10 brought to the fore the debate on the role of commodity futures market in influencing price trends.
Further measures likely
Indicating further stronger monetary measures, the RBI stated that “while at the beginning of the year the overriding macroeconomic concern was faster and stronger recovery (economic), by the end of the year that concern had subsided significantly, but an equally discomforting concern had surfaced in the form of high and generalised inflation.”
Large divergence between inflation as measured by wholesale and consumer price indices was a major feature of inflation . The differences in inflation across States have also been significant. The RBI also stated that the borrowing programme of the Government for 2010-11 has to be managed, “keeping in view the pressure on yield from the elevated inflation, gradual withdrawal of excess liquidity and stronger pick-up in private sector credit demand.”
