t’s optimistic to expect change in supplies soon: Mint 12th December 2009

Except by getting physical supplies, you can’t control inflation in any other way. says Madan Sabnavis, chief economist at the National Commodity and Derivatives Exchange Ltd: ravi Krishnan

Mumbai: Wholesale food prices rose at the fastest in 11 years to scale 19% for the week ended November 2008, fuelling inflationary expectations. Mint spoke to Madan Sabnavis, chief economist at the National Commodity and Derivatives Exchange Ltd about the reasons for the steep rise and the likely policy impact. Edited excerpts:
What are the reasons for this high increase in food prices?
It’s caused by a combination of three factors—the first is that kharif output has been officially stated to be lower than what it was last year, major gaps being seen in food grains, oil seeds and sugar cane. Second, the carryover stocks in case of pulses, oil seeds and sugar cane are not high enough. So we have stocks of only rice and wheat which are officially maintained by the Food Corporation of India. So, therefore, we don’t (have) any kind of stock, which can help us tide over this crisis. Third, are we in a position where we can import products where the harvest has not been satisfactory?
The answer is yes and no. Yes, we can import something like sugar, but the international prices are also ruling at a very high level. (But) for something like pulses, there are limited countries which grow pulses and could supply us like Canada and Burma. They also have their own seasons and until those seasons coincide (with ours) and we can get those imports in, we will continue to be afflicted with these kind of problems.
Besides, another reason (for the high inflation) has been the high rise in the prices of vegetables, in particular. Here we have been quite severely affected by the floods in Andhra Pradesh and Karnataka. So what we are really looking at is the next crop of vegetables, which should be probably coming in a month’s time or so. It’s only then we could hope to have some relief.
Do you think it’s going to fan inflationary expectations?
Normally what happens in October, November, December, prices of agricultural products would tend to come down, for the simple reason that we have the arrivals (harvest) coming into the market. But unfortunately what we have seen this year is that week-on-week inflation is also going up. Which evidently means that we are having severe problems in terms of supply. So, to expect a change to happen very soon is a bit optimistic.
So, this is supply side inflation and monetary policy wouldn’t have any impact.
Today, when I am talking about inflation being a supply side phenomenon, when it’s because of shortages—by increasing the rates, RBI (Reserve Bank of India) is not going to bring down the prices, because I don’t have the supplies of the commodities. Except by getting physical supplies, you can’t control inflation in any other way. But the fact that high inflation leads to high inflationary expectations, which is the case today, will prompt RBI to take the monetary policy option. Sucking out liquidity will not make too much sense. So, if RBI wants to send a strong message that it wants to control inflation, it will have to be through interest rate movements.