– By Manish Jaiswal
After several euphoric years India is going through a phase that needs reflection and action. The rise of inflation, particularly food prices, is the government’s immediate focus, which it is addressing by tightening monetary policy.
But here’s the twist: while fighting food inflation, the authorities are also inadvertently raising borrowing costs for everyone across the board. For housing finance, this means higher EMIs and longer tenors, making loans harder to repay. With additional stress on family budgets, the risk of loan defaults goes up. It’s a financial treadmill – people keep running, but the debt keeps extending.
For the economy, it’s a ripple effect. As people have less disposable income to spend on goods and services, businesses take a hit. Unemployment rates rise and consumer confidence takes a dive.
All because a few vegetables became costly. It somehow does not befit a nation aiming to become a $10 trillion economy. With utmost empathy for people feeling the impact of inflation, vegetable prices can be controlled through MSP (Minimum Support Price) or targeted intervention, rather than cooling down the entire economic engine.
So, what’s the fix? The government should take a more balanced approach. Control inflation, yes, but also ensure that loans remain affordable.
Here are a few relevant points and data to consider.
Rising Incomes, Changing Tastes
Over the past two decades, India has transformed from a land of dal-chawal budgets to a country exploring sushi bars and avocado toast. According to the NSSO Household Consumption Survey, food expenditure in rural India has dropped from 53% in 2005 to 41% in 2021, and from 42% to 30% in urban areas. Yet, a corpulent 45.86% of the Consumer Price Index (CPI) basket is dedicated to food, clinging to a bygone era when GDP per capita was under $1,000.
In a nation where the GDP per capita has crossed $2,500, and disposable incomes have risen 6-7% annually, our inflation basket needs to be rebalanced to suit a more prosperous, urbanized, and diversified India.
Global Benchmarks: How Others Manage the Heat
India’s emphasis on food inflation stands out like a heaping plate of biryani at a minimalist fine-dining restaurant. Here is a global perspective.
• United States: Food gets a mere 13.6% of the CPI basket, and inflation management focuses on core inflation.
• European Union: Food weightage is between 15-20%, with strategic reserves and farmer subsidies stabilizing prices.
• China: At 19.9%, China views food inflation as a supply chain issue, investing heavily in agricultural technology, cold storage, and logistics.
Closer home, Indonesia (21.8%) and Vietnam (22%) have recalibrated their CPI baskets to align with growing incomes and urban lifestyles.
The Real Root of the Problem
The truth is, food inflation in India is less about demand and more about supply-side inefficiencies. Poor storage, fragmented markets, and unpredictable weather make our food prices as volatile as the stock market.
Policy tools like interest rate adjustments often appear as quick fixes but may not directly address these structural challenges. Instead, the focus needs to shift toward addressing systemic inefficiencies and ensuring that food inflation is managed holistically.
A Recipe for Structural Reform
Some of the improvements that can be made are:
1. Shrink the Food Share in CPI.
• Adjust food’s weightage to around 30% to reflect modern consumption patterns better and reduce economic disruptions tied to food price volatility.
2. Modernize Agriculture
• Invest in climate-resilient crops and agri-tech to improve resource use and reduce wastage.
3. Fix Supply Chains
• Build cold storage facilities to prevent post-harvest losses of 30-40%. Streamline markets to create fairer systems for farmers and consumers alike.
4. Promote Diversification
• Encourage production beyond rice and wheat, focusing on pulses, oilseeds, and high-value crops to stabilize supply and demand.
5. Leverage Strategic Reserves
• Maintain reserves of key staples to cushion against supply shocks and support price stability.
(Manish Jaiswal is the Managing Director and Chief Executive Officer at Grihum Housing Finance Limited.)
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