India?s persistently high food inflation is driven by ?fundamental? factors, RBI deputy governor Subir Gokarn said on Thursday, in what sounded like a grim warning to those who claim that chance factors like the monsoon and temporary supply constraints caused it. ?I think there is sufficient evidence to suggest that food prices are being driven not by transitory factors such as rainfall but by more fundamental factors,? Gokarn said.
The noted economist?s remarks came on a day when official data showed that year-on-year inflation rate for food articles rose to 9.13% in the week to June 11, from 8.96% in the previous week. Food inflation has remained at an average level of 15% in the last couple of years, implying sticky price pressures. There was some let-up in early May when the rate moderated to below 8%, but there has again been an upturn for the past three weeks.
Gokarn?s comment signifies that with the wait for a significant moderation in food prices dragging on longer than expected, policymakers can no longer take comfort by assuming that supply constraints resulting from cyclical factors caused the prices to spiral. Planning Commission deputy chairman Montek Singh Ahluwalia recently said that food prices would ease on increased supply of grain and pulses, but that optimism seems to be belied by demand-driven rise in the prices of eggs, meat and dairy products.
?It is generally believed that food prices are highly sensitive to monsoon performance, but this belief has been tested over the past few years,? Gokarn was quoted as saying in Chennai. Apart from being a key driver of headline inflation, higher food prices could also indirectly push up inflation in the form of higher wage demand, Gokarn said, adding that there was already some evidence of that.
Gokarn?s statement reinforced the forecast that RBI, which hiked interest rates for the 10th time in one year and signalled more increases in its mid-quarter policy statement on June 16, would persist with its hawkish monetary policy stance. The RBI has conveyed that its current focus is to rein in inflation, even at the cost of sacrificing some growth.
The government too seemed worried over the spurt in food inflation.
Finance minister Pranab Mukherjee said on Thursday that the rise was ?not acceptable? and vowed to bring it down.
?It is increasingly clear that the high rate of food inflation is because of weak supply response to rising demand,? said DK Joshi, principal economist at Crisil. ?There has been a general strengthening of food prices, whether or not a supply problem existed,? he said. Stating that food inflation has remained uncomfortably high, Gokarn said the lasting solution would be to increase supplies.
Thursday?s data showed fruits and milk became dearer by 28.66% and 15.30% respectively in the week to June 11. Other items which turned costlier were onion (11.89%), egg, meat and fish (10.56%), cereals (4.32%) and potato (0.71%). Food items have a weight of over 14% in the overall WPI (wholesale price index) basket.
Headline inflation rose an annual 9.06% in May, above the April figure of 8.66% and well above the RBI?s projection of 6% by March 2012.