The Centre has unleashed a number of fire-fighting measures to moderate the sharp spike in vegetable prices, especially onion. Onion exports have been banned and duties on imports of this commodity have been done away with. Imports from Pakistan and neighbouring countries have been undertaken on a priority basis.
At the highest level, the government has tried to talk down the onion prices. But it is the prospect of imminent imports (more than any other factor) that has resulted in moderation of prices although the retail prices are still uncomfortably high.
High onion prices, above all, pose a political problem. Viewed as a manifestation of all that could go wrong with official food policies, the high prices can cost the ruling parties dear.
In the past, there have been occasions when the widespread public discontent and anger over high prices of vegetables, especially of onion, became the rallying point of political opposition. In 1998, the BJP Government in Delhi lost the elections because it could not rein in the onion prices. In fact so politically sensitive have been the onion prices that it is surprising that governments do not monitor the supply of this commodity on a continuous basis, the way they keep tab on the demand and supply of cereals, pulses and so on.
Crop damage
It would have been prudent to anticipate the problem instead of letting it grow to such crisis proportions. It was known that unseasonal rain and inclement weather in the main onion-growing regions of western India have damaged the crop. The demand for onions (as well as other vegetables forming part of the food basket across India) is inelastic. Rising prices may, therefore, discourage consumption only marginally. On the other hand, it may encourage housewives to buy more of the vegetable than they would have in normal times. Persistently high prices of essential commodities may induce ‘stocking up' of a commodity before its price goes up. This ‘hoarding by consumers' phenomenon ought to be studied in greater detail but anecdotal evidence suggests that it does exist.
The more conventional explanation attributes the price rise to hoarding by traders. There is no doubt at all that some traders are trying to capitalise on the shortages. Many point to the sharp mark-up over the retail price as evidence. In the middle of last week, onions were sold for Rs.80 a kg in the retail market whereas in the wholesale market the price was just a third or fourth of that. The most efficient anti-hoarding measures should include steps to increase supply (also through timely imports, if need be) and competition in the distribution. A related suggestion is to streamline the supply chain and reduce the bottlenecks. There are far too many intermediaries between the farmer and the consumer.
According to a recent study, as many as nine or ten middlemen, with their own mark-ups, drive up the prices. Eliminating or minimising their number, however, has not been easy so far. Among other reasons, such moves have political repercussions. Besides, alternative proposals such as bringing in big retail have been opposed politically.
For policymakers, the high vegetable prices have plenty to do with inflation and inflation expectations. Surveys, by, among others, the Reserve Bank of India, point to a hardening of inflation expectations recently.
The rise in the retail prices of petrol and the possibility of diesel prices following suit have certainly contributed to the belief that prices of essential commodities will not come down in the near future. Quite ominously, global oil prices have touched near-time highs. High onion prices have forced the government to absorb the price increases in diesel, whose retail prices are still controlled. That is one instance of the government having to back down on reform in a critical area in the face of a sharp spike in food prices. But quite obviously it is the monetary policy that will be watched with renewed interest.
Most analysts expect the RBI to hike short-term interest rates at the time of the next policy statement due in January, 2011.
In its recent policy statements, the RBI had hinted that there would not be interest rate increases in the near term. This was taken to mean that the period of monetary tightening was over. Yet, as always, the RBI's stance is subject to a few caveats.
Other risk factor
Rising global commodity prices have been one risk factor. A resurgence of inflation and the need to frame appropriate monetary responses has always been on the cards. In fact, the central bank has stated that it might have underestimated its inflation target of 5.5 per cent by March 31, 2011. As for food inflation, it has been pointed out that there is a shift in the consumption pattern towards milk, meat, eggs and so on. There is less dependence on wheat, rice and other cereals.
The moderation in the prices of items in the former category has been less compared to the latter category. In addition, the hardening of inflation expectations would necessitate a rate hike. Interestingly, the softening onion prices will not be reflected in the forthcoming weekly inflation index which is always announced with lag.
The annual headline inflation eased to 7.48 per cent in November, its lowest level in a year, from 8.58 per cent in October. However, the food inflation index, which is released at weekly intervals, rose to 12.13 per cent on December 11 while the fuel price index climbed to 10.74 per cent over the previous year (the overall WPI inflation index, monetary policy's reference point, is released at monthly intervals). In the previous week, annual food and fuel inflation stood at 9.46 per cent and 10.67 per cent, respectively.
