Rate of inflation and food production – Part II: A disconnect By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

September 13, 2016 | Posted by bobbysrinivasan << back to blog

This is an ongoing conversation between the student and his professor.

Student: Professor, I read in the papers that India has set a target of 270.1 million tonnes of food grain production in 2016-17. The government set the target of 264 million tonnes for 2015-16 and achieved 252.2 million tonnes. Given the high expectation, does it not naturally follow that the price rise should not happen?

Professor: Correct. Besides the government has in its warehouses 49 million tonnes of cereal (22.1 million tonnes of rice and 26.9 million tonnes of wheat) as of August 2016. This is much lower than the 55 million tonnes (18.7 million tonnes of rice and 36.8 tonnes of wheat) which they had on August 1, 2015. Apparently the inventory level does not have much impact on the CPI. By the way the food items account for 39.06% of the CPI.

Student: There where do seek an explanation for this high level of CPI.

Professor: Let us speculate,

It is due to high cost of funds inventory costs are going up due to this and this adds to the CPI.
It is due to non-performing assets of banks. Lendable funds have shrunk especially for food inventory buildup. This is pushing up costs of holding and hence the CPI.
The volume in the commodity market is going higher and higher. Traders are probably seeing an opportunity to make money in the commodity market. It is not unusual and happens all the time in the Chicago mercantile exchange.
It could be due to family boarding grains seeing that the inflation is marching ahead families are buying their grains, dhal and oil to beat the inflation. Imagine collectively, how big an inventory that could be. Recently we witnessed severe hoarding in Venezuela and which led to street riots. If the government does not put in the effort and do whatever it takes to control inflation the public will view not only that it is being affected financially but also take steps to protect themselves. I recall in 1980, Dr. Paul Volcker, US Fed Chairman raised the repo rate (Fed funds rate) to 20% to kill inflation and achieved it big time. I feel that Dr. Rajan stand is correct as the US has witnessed controlling of inflation successfully through interest rate mechanism.
Lack of pronounced sensible policy about inflation targeting by the government. Both fiscal and monetary authorities cannot have different opinion about targeting inflation rate. They have not understood the impact of the inflationary expectation. They should study at Chinese history and the see how communism under the chairmanship of Mao grew and literally destroyed the country for 27 years.

Hey I am giving you a long story. Let us end it have, OK.

Student: Yes, Professor.

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