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Fretting about the price of onions: inflationary pressures build in the Indian economy

Indian economy | Fretting about the price of onions: inflationary pressures build in the Indian economy Ian Fraser

India is in a state of high anxiety right now ... about the price of onions. One year ago, a kilo of onions - a staple ingredient of even the most basic Indian cuisine - cost 25 rupees in a typical street market. Today that’s soared 50 rupees ($2). Earlier this month the price briefly breached the 100 rupees per kilo barrier, triggering a national furore and banner headlines on the front pages of Indian newspapers.

As The Globe and Mail’s Stephanie Nolen puts it:

“The daily drama of the onion market has sparked street protests, threatened the political future of a cabinet minister and caused new tension with Pakistan … The prices hikes caused everything from protests at the village level to angry tirades with the “onion” hashtag in this Twitter-crazy country."

Onion prices are surging because of unseasonal rain, which flattened crops in Maharashtra last October. The soaring price of the bulbous plants is part of a wider picture of rampant food price inflation worldwide. In India, the price of other staples is surging, as are energy prices, against a backdrop of continued rapid economic growth.

According to a recent Reuters survey of economists, the Indian economy is expected to grow by 8.7% in the year to March 2011, and 8.5% the following year.

Inflation too is rising. Using India’s favored yardstick - the wholesale price index (WPI) - Indian inflation stood at 8.4% in December 2010, up from 7.5% in November.

According to the Economist’s Free Exchange blog, “this makes India something of an anomaly globally. In rich countries deflation remains the bigger worry, but India’s inflation is also substantially higher than in other emerging economies.” (However, before getting carried away, it’s worth pointing out that Indian inflation was stubbornly above 10% for much of the first half of 2010.)

And the Reuters survey suggested that, having averaged 8.8% in the year to March 2011, inflation will average 6.4% in the year to March 2012, higher than the last estimate.

The Reserve Bank of India, the country’s central bank, has been spurred into action. India’s benchmark interest rate bottomed out at 3.25% during the financial crisis but since March 2010 it has been tightening gradually. In November 2010, the RBI increased base rates to 5.25%.

The man in charge is Duvvuri Subbarao, governor of the RBI.  Like Joseph Stiglitz, he is a former the chief economist at the World Bank (Subbarao held the office in 1999-2004).

In a recent interview with International Business News, Sibbarao admitted that controlling inflation was a balancing act, suggesting that monetary policy would need to undertake demand-side management whenever inflation turns high and starts to feed on itself through expectations. He said:

“Controlling inflation - particular food inflation - is no easy task in this environment, given the ample amount of global liquidity and the natural disasters/poor weather conditions that have been negatively impacting the worldwide farming sector.”

However Subbarao didn't seem to think that the wall of "hot" money unleashed by QE2 in the US was driving up food prices via speculation, insisting it is more likely to be down to demand/supply imbalances. He didn't seem to think importing more food (and India is notoriously protectionist) would do much to unblock supply bottlenecks. “The lasting remedy is an effective supply management in the medium term.”

Kalpana Kochhar, a senior official at the IMF’s Asia desk, argues that India is a chronically supply-constrained economy, with chronic excess demand. In the course of the economic cycle, he said, price pressures tend to get exaggerated.

In his IBN interview Subbarao said the “jury remains out” in whether central banks ought to be watching out for asset price bubbles.

“India has been among the first countries to use counter-cyclical prudential measures as a supplementary tool. Although the basic objective of such measures was to protect banks’ balance sheets, such sector-specific prudential measures also helped modulate credit flow and ensure credit quality. Recently, the Reserve Bank announced some measures to check the growing exposure of the banking sector to the real estate sector.”

Asked what he had learned from the the financial crisis and the global 'currency wars' Subbarao said:

“This crisis has taught us several things. First, that in pursuit of growth and price stability, central banks cannot ignore financial stability. We have learnt that financial stability can be jeopardized even if there is price stability and macroeconomic stability. Second, the crisis has taught us that in a globalizing world, decoupling does not work. In the long run, the futures of emerging economies are tied to the fortunes of advanced economies. Third, [the] financial sector cannot get ahead of the real sector. The growth of the financial sector has meaning only if it aids the growth of the real sector. Finally, we have learnt that in solving this crisis, we should not sow the seeds of the next crisis ...

On what you call ‘currency wars’, it has been empirically demonstrated that the policy of beggar-thy-neighbour does not pay dividends in the long-run and indeed could be self-defeating. Central banks are quite aware of the futility of such a strategy, however compelling the situation may be. Our collective effort at all international fora, including the G20, is to foster sustainable cooperation on issues of global concern."

Further reading on India and the Indian economy:

Tags: asset price bubbles , emerging markets , India , Indian economy , inflation , real asset inflation , Reserve Bank of India
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  1. ketan says:
    Wed Jan 26 15:24:19 GMT 2011

    I think the inflation issue has more than just macro economic perspectives in India. It related to supply chain, agriculture economy,infrastructure and more importantly political willpower . This govt. has been running Unique Identification project, vital component not only for information infrastructure,but also important for inclusive growth.But Government came into action at last moments as media reports suggest. beside external factors(e.g. oil prices), the internal factors have not controlled by Dr. Singh's Government in its second term. what to do with human resources, government machineries, IT talent when such situations not predictable and tractable ?

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