Modi sticks to failed recipe in food inflation fight
Aug 08 2014 , New Delhi
"Buying tomatoes feels like buying jewellery," says the 29-year-old maid, who is struggling to make ends meet on her monthly pay as prices for fresh staples such as onions and potatoes also soar in New Delhi.
Prime Minister Narendra Modi's election triumph in May had raised hopes of quick action to tackle the recurring food price shocks. But, despite his strong economic record of running Gujarat, he has resorted to an old inflation playbook that contributed to the last government's crashing defeat.
Just like his predecessor, Modi has imposed export curbs and cracked down on hoarding. While these steps can give brief relief, they cannot fix a dilapidated system controlled by middlemen.
So far, the cash-strapped government has committed to invest less than one-tenth of the amount it estimates is needed to fix India's cold supply chain. It opposes the entry of foreign supermarket giants who might set up their own logistics.
Its only innovation, a food price stabilisation fund, is at $82 million derided as too tiny to make any difference in feeding the country's 1.2 billion people.
Economists who had backed Modi to put Asia's third largest economy back on track are already expressing unease at the government's failure to lay out a credible inflation strategy, beyond short-term improvisation.
Modi's approach is that of a "district collector" rather than a structural reformer, said Rajiv Kumar, a senior fellow at the privately-funded Centre for Policy Research in New Delhi.
"This is my fear about this government - that it is being captured by the bureaucrats," Kumar says. "Competition is the best short-term guarantee to reduce prices."
Officials privately concede that inward investment in multi-brand retail would help revamp an archaic distribution system that forces farmers to sell at regulated markets where middlemen command hefty markups.
India is the world's second-biggest producer of fruit and vegetables after China, but it battles chronic shortages as an estimated 18% of the crop goes waste every year due to inadequate cold storage and refrigerated transport facilities.
New Delhi estimates it needs to invest $9 billion in the cold supply chain by March 2016 to handle growing output of fruit and vegetables. That is more than 10 times the $822 million allocated in Modi's maiden budget last month, and far more than the government can afford.
The South Asian nation has 6,300 cold storage facilities with capacity of 30 million tonne, barely half its needs, the National Horticulture Board estimates.
Annual retail inflation has averaged about 9.5% since January 2012, when the government started its latest data series. In the same time, vegetables have gone up by 64%.
"Last year, it was onion; this year, it is tomatoes; next year, it will be something else," says Nirmala. "Every year the story remains the same."
Onion prices surged last year as high as $1.60 a kilogramme, making them more expensive in India than in the United States, where incomes are roughly 35 times higher.
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Economists say curbing runaway food prices will be vital if India is to achieve a broader revival from a two-year-old slowdown in growth. Food bills devour 35% of household incomes, sapping appetites for discretionary spending.
Prices for fresh produce also are causing indigestion at RBI, which wants to reduce retail inflation to 6% by 2016. The Reserve Bank of India held rates on Tuesday, citing the risk that inflation could get higher due to weak monsoon rains needed for summer crops to grow.
Abhijit Sen, an adviser to the last government, says only a combination of more cold stores and better mobility of food stocks can solve the problem. But ramping up investments will be a challenge due to stretched government finances.
"That's the situation which this government faces as much as the previous government," Sen told Reuters.
A senior official in the Modi administration defended its inflation approach, saying prices would have risen even more quickly if the government had not taken prompt action as recent extreme heat and dry weather stoked food supply fears.
"We all know the long-term solutions, but they will not solve the problem overnight," he said. "At the moment, administrative measures are the only recourse."