Food inflation is in the news again. The Wholesale Price Index’s food articles inflated by 11.08% in November. Earlier in the month, data on retail inflation showed that food prices at the retail level too are now inflating in double digits. India did experience a persistent bout of food inflation a few years ago, but the current situation is different which requires heterodox responses.
The WPI displayed contradictory trends. Even as food articles inflated by more than 11%, manufactured products deflated by 0.84%. It was the third consecutive month of manufacturing deflation. Therefore, the economy is in a situation where food, which makes up the largest basket of consumption items for an average Indian household, is squeezing budgets. Simultaneously, the poor state of the rest of the economy precludes the possibility of significant income growth.
In this situation, it does not make sense to use policy interest rates as a tool to deal with inflation. It is best for the central bank to look through the current spell of food inflation. However, given the fragile state of the financial sector and the absence of animal spirits, a reduction in interest rates is unlikely to pull the Indian economy out of the current situation.
The only way out now is a committed attempt to unleash the next generation of economic reforms that has been long pending, and simultaneously use the forthcoming budget to design a fiscal package which focuses on public investment in infrastructure. This investment will have a positive spillover on the private sector.