Published on 14/05/2019 10:35:37 AM | Source: HT Media

Will food inflation be a pain for next government? All depends on cloud cover

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Mumbai: Indians had the good fortune of experiencing benign food prices for the last two years.

This streak is now about to end as food inflation is back. It was 1.38% in April after nearly 30 months of disinflation.

The sustainability of this rise depends on a single factor, which is monsoon. The weathermen have so far forecasted a normal monsoon for India, but risks still persist.

If it rains are below expectations, the steady rise in food prices would flare up, which would be a headache for the new government.

Also, if the rise in food inflation is more than what has been anticipated by Reserve Bank of India (RBI), the odds for policy rate cuts reduce.

So far though, the rise in food prices has been according to the RBI's expectations. In April, the central bank had indicated food prices would drive up the headline retail inflation to 2.9-3.0% in the first half of FY20.

Luckily for the RBI, its biggest worry, core inflation has been easing. That still leaves room for cutting policy rates further. “The odds for more monetary easing in the June MPC have clearly increased, as CPI inflation is evolving as expected and upside inflation risks remain in check, despite the recent spike in oil prices," according to Gaurav Kapoor, chief economist at IndusInd Bank.

Meanwhile, the political response to food inflation would matter a lot.

But for a country used to high food prices, should a mere 1.38% inflation matter?

It should because food inflation is a double-edged sword: too much hurts all citizens alike and too little ravages the rural economy.

Food disinflation has caused a lot of heartburn for the current government and electoral polls have seen the battle on farmer distress take centre stage.

Logically, this would mean rising food prices should be good for the incumbent government as it increases farmer incomes and would alleviate rural distress.

Here is where it gets complicated.

According to a report in 'The Indian Express', the reason of food inflation has been the drought reported in parts of southern India. Food prices have also began galloping as farmers cut production in response to the disinflation seen so far.

The effects of rising food prices on farmer incomes won’t be visible until the harvest time, which is months ahead.

Which brings us to monsoon. Not just how much it rains, but what would matter more is the spatial distribution too. Food inflation outlook is cloudy for the incoming government.