Can India Get Soaring Food Inflation Rates Under Control?

India’s inflation in food prices has been soaring lately — holding for weeks above 17 percent — due to a combination of factors including the weakest monsoon rains in nearly 40 years, new taxes on gasoline and diesel, and increased excise taxes on a wide variety of products.

From BusinessWeek:

“An index measuring wholesale prices of lentils, rice, vegetables and other food articles compiled by the commerce ministry rose 17.87 percent in the week ended Feb. 20 from a year earlier, following a 17.58 percent gain the previous week, according to a statement in New Delhi today.

“Indian truckers, who carry about 65 percent of the goods in the country, increased transportation rates by as much as 15 percent, the All India Motor Transport Congress said today. The move came after Finance Minister Pranab Mukherjee on Feb. 26 imposed excise tax on gasoline and diesel as part of a plan to start withdrawing fiscal stimulus and cut the budget deficit.

“’The increase in transportation costs is likely to fan inflation in the short term,’ said Sujan Hajra, chief economist at Anand Rathi Financial Services Ltd. in Mumbai. ‘In the coming months, inflation will remain a huge macro-economic issue for policy makers.’”

For now, India will begin selling foods like rice and wheat from emergency reserves to bring down the prices. It’s important that food price inflation eventually returns to lower levels or workers will demand higher salaries which would then increase price level for services and goods throughout the Indian economy.

You read more details about India’s strategies for inflation targeting in BusinessWeek coverage of how India food inflation may be quickening.


Rocky Vega,
The Daily Reckoning

The Daily Reckoning