[blurb-capmind-prem]
We’ve been worried about Inflation, here at Capital Mind. Because Consumer price inflation is running at 10%. Because food inflation has gone above 12%. Because it’s been resulting in wage increases, and price increases in all parts of the government.
While we can blame RBI for monetary expansion – which I believe is a fundamental reason for this inflation and there is sadly no plan to contract monetary supply – we also have to look at a big cause of food inflation: the government.
The Indian government through the Food Corporation and other sources, buys agricultural commodities directly from the market. They then attempt to distribute those through the Public Distribution System (PDS) but a good portion rots, and much of the rest is stolen or siphoned off.
The purchasing happens at a fixed rate, called the Minimum Support Price, which is one price per commodity. We have about 6 years of this data from the Agri Ministry, and if you look at those six years in context, you will find that prices have gone up in a huge way. Here’s the compounded annualized growth rate since 2007-08:
Nearly all items have gone up, and the average increase is greater than 12% per year! No wonder that food Inflation remains this high.
One of the reasons the government increases prices like this is to keep farmers happy. However, is it okay to make the rest of India unhappy? Why are we paying such heavy prices?
Minimum Support Prices are a signal that tells farmers they have a buyer at some price. But this signal has become a market floor of sorts causing massive inflationary pressure on food items.
Here’s a visualization of how MSP increases have been since 2007-08 (assuming 2007-08 is the base value).
My View: We should dramatically lower support prices and reduce purchases to keep only as much stock as required to meet the PDS requirements. A few years of this and prices will revert. Oh,and the RBI needs to cut liquidity
None of the above is politically palatable, so it’s unlikely to happen.No matter who wins the next election. Prepare to pay more or eat less.
Note: Thanks to Nikhil Pahwa and his pointer to a BusinessInsider post .
