Food prices in India have remained stubbornly high, with annual inflation running above 15% since November 2009. India is by no means the only country struggling with food inflation.

A comparison of India?s food inflation with that of the other emerging markets, and China in particular, provides an insight into why food inflation will remain a chronic problem for Indian policy makers and reveals striking dissimilarities between India and China in terms of policy responses and their effectiveness.

The emerging markets experienced a rise in food inflation through 2007 and into early 2008 as international food prices spiked amid worries about a global food crisis, before falling sharply as the economic downturn reduced demand. Beginning mid-2009, however, food prices reemerged as a driver of overall inflation in Asia, with prices of cereals, rice, fruits and vegetables outstripping overall consumer price inflation. The trend, most visible in India and China, threatens to complicate policy makers? task of exiting their stimulus without smothering growth.

China?s 2007-08 food inflation, which peaked at almost 25% in early 2008, was driven by high domestic pork prices that accounted for almost two-thirds of the total increase in food prices. After falling into negative territory in early 2009, Chinese food inflation started to rebound in August 2009, driven primarily by fresh fruits and vegetables. In May 2010, Chinese food price inflation was 6.1%.

Indian food inflation followed a starkly different path. Food prices in India rose steadily from early 2008?well before the poor 2009 monsoon that was blamed for the subsequent inflationary spike?through November 2009, when they peaked at 21%, before declining to their current still-elevated levels. India?s food inflation has been driven by rising prices of sugar, pulses and cereals. India was the only major emerging market that did not see food inflation decline when global agricultural commodity prices collapsed in 2008.

Those differences apart, the causes of food inflation in both India and China are broadly similar and stem mainly from structural supply-side problems in the rural sector that have been aggravated by increased demand. Both countries suffer from supply chain and distribution inefficiencies, and a largely unreformed agricultural sector. The supply constraints are familiar: small plot sizes that limit mechanisation and economies of scale, inefficient use of fertilisers, water shortages and reduction in arable land area.

The Chinese, like the Indians, have been content to rely on rural subsidies that have encouraged the status quo in farming, even as demand has been rising. Hikes in minimum support prices for rice and wheat, along with an increased government rural spending, have boosted rural incomes in India. That status quo will prove untenable in the future as stagnating yields will eventually force China and India to modernise agriculture.

In the meantime, Chinese and Indian officials are adopting different approaches to deal with the issue. China has been ruthlessly efficient. After pork prices spiked in 2007-08 as the blue-ear disease wiped out the country?s herds, the Chinese government set up a frozen pork reserve and offered subsidies to pig producers. Pork prices are now back to the pre-crisis levels. In dealing with the more recent increase in food prices, Chinese authorities fully recognise the structural nature of food inflation and have discounted its effect in formulating monetary policy, especially as non-food inflation remains relatively subdued (it was just 1.6% in May 2010). Instead they are adopting a strategy of using food imports to avoid any inflationary spike (this despite their frequently reiterated policy of grain self-sufficiency). China increased corn imports almost nine-fold in the first five months of 2010, for example, to make up for a supply shortfall and tamp down domestic prices, and has been largely successful in doing so.

India?s response to food inflation has been less successful.

Instead of dealing with supply constraints underlying higher prices, it focused on demand-targeted monetary policy, hiking interest rates in March and April. Now food inflation has already spilled over into wholesale price inflation, which reached 10.2% in May, and RBI is under pressure to hike rates further. However these short-term monetary policy measures will not address the structural causes of food inflation, which will remain a cause of concern even if the current monsoon meets expectations. Last week?s comments by RBI deputy governor Subir Gokarn to the effect that rate hikes alone will not control food inflation are welcome, but long overdue.

Only the shock of an increased dependency on food imports will force China to modernise the agricultural sector. In India, agricultural reform is still not high on the political agenda and any improvements in modernising supply chains, expanding organised retail or development of wholesale commodity markets will remain piecemeal. Until that changes, and policy responses move beyond a reflexive call to hike interest rates, Indian politicians? assurances about food prices will continue to lack credibility.

?The author is a director at Trusted Sources, the Emerging Market research specialist