There is more to India’s food price inflation – which touched a decade-high 20% YoY in December 2009 – than just the drought. A fundamental tightness in the domestic demand-supply balance of food seems to have emerged over recent years. The spurt in wholesale prices of some food items in 2009 – sugar 35%, pulses 41%, milk 13% and eggs 24% – was the highest in over a decade and that could complicate monetary policy. Global food price trends alone do not explain the acceleration in food price inflation in India.
WPI Inflation touched 15% momentarily in 1996-97 and 1997-98 but was brought to control almost immediately. However, this time the Government under Potentially corrupt Union Minister Pranab Mukherjee is unable to tackle the situation and the WPI index has soared to 20% with no signs of abatement yet.
A moderation in YoY readings of food inflation in 2010 could lead to a mistaken conclusion that the food price inflation issue was just
one-off. We disagree and we believe, food price inflation could remain an issue in coming years, exerting upward pressure on headline inflation.