Though transitory episodes of food inflation do not warrant a monetary policy response, there are strong justifications for acting in the face of more persistent ones, if the objective is to keep overall inflation in check, according to Dr Subir Gokarn, Deputy Governor, Reserve Bank of India.
Quickly increasing the productivity of proteins and fruits and vegetables is the highest priority, both from the perspective of development and standards of living and from the viewpoint of monetary policy, he said at the Kale Memorial Lecture at the Gokhale Institute of Politics and Economics.
“When prices are rising because demand is growing strongly while supply stagnates or fails to keep up, there is no alternative to curbing food inflation than raising supply rapidly. The current pressure on the prices of proteins and fruits and vegetables is clearly the outcome of this combination of circumstances.
“However, raising productivity quickly is itself a serious challenge, given the pressures emanating from both labour costs and, over longer horizon, what appears to be a structural reduction in the absolute amount of rainfall,” explained Dr Gokarn.
The RBI, in its second quarter review of its monetary policy in October, said that the inflation outlook will, among others, depend on the supply response in respect of those commodities where there are structural imbalances, particularly protein items.
Therefore, concerted policy focus to generate adequate supply response in respect of items such as milk, eggs, fish, meat, pulses, oilseeds, fruits and vegetables will play a major role in shaping the behaviour of food inflation in the near term. According to Dr Gokarn, the transition from a cereal-dominated diet to a more balanced one with a greater appetite for proteins and fruits and vegetables is something that all countries have seen, and India is no exception.
“It (the transition) is in full swing today and the absence of a strong supply response means that many aspiring consumers will actually be denied the opportunity to make that transition,” the deputy governor said. The Deputy Governor observed that persistent supply pressures on the economy, whether they are from food, energy, labour or any other critical input, are clearly not very good for maintaining the balance between fast growth and low inflation.
“A permanent supply shock leads to lower growth and higher inflation, which could further fuel inflationary pressures through expectations. In this situation, central banks have to choose between the risk of inflation spiralling through expectations and the burden of slowing growth even further by anti-inflation policy measures,” he said.
Dr Gokarn felt that an effective strategy for supply enhancement must be compatible with both the nature of the commodities and the state of the economy. “I have no doubt that such a strategy can be devised from existing knowledge and the right kinds of resources being brought together. Co-ordination will be the key,” he added.