Indeed, food price inflation which has lasted for two years - long ignored by Government except for some ineffective routine steps over the last year - had increasingly become the core concern of RBI which had rightly anticipated its translating into generalised inflation. Its gradual tightening of monetary policy since January is in recognition of this while taking care of liquidity for growth.

At a time, the Government was exulting over a decline in WPI during the latter half of 2009 - overlooking the persistent level of double-digit food price increase since mid-2008 - the general inflation had already begun its onward march. WPI inflation had hit double digit even in February (10.06 per cent) and rose further in March to 11.04 per cent. The April figure of 9.59 per cent, which cheered Government to detect a downtrend, is to be revised up shortly along with May. Inflation is now across the board, no longer one of primary products, chiefly food. May figures show manufactured products index had risen by 6.41 per cent.

Food prices were being explained away as a fall-out of drought in 2009, treating a continuing trend as of no consequence and holding no threat to food security since Government had “adequate stocks at its disposal“ all the time. The deadlines set by the Deputy Chairman of the Planning Commission at regular intervals for food prices to decline all misfired. Now, new deadlines set for headline inflation to come down are “after July” (Finance Minister), end of the calendar year (Mr Montek Ahluwalia), and beginning “shortly” to go down to 5 per cent by March 2011 (Mr Kaushik Basu, Chief Economic Adviser). Mr Basu even contends that food inflation has “virtually petered out” and also advocates quick action on freeing up petroleum product prices.

Dr. C. Rangarajan, former Governor of RBI and Chairman of PM”s Economic Advisory Council, who had been sounding a note of caution on prices, said with inflationary pressures becoming “stronger”, some action would be called for by RBI in terms of policy tightening”. He also urged action on the demand side. While economists including the Deputy Chairman of Planning Commission have echoed Dr Rangarajan,s view, the Finance Minister reportedly said in Patna though inflation would remain in double digits till July, he was against any increase in interest rates at the moment which could affect growth.

Essentially, this government is concerned with growth and revenues and fiscal consolidation. While there can be no question about the key role of growth for government revenues, whether it is inclusive or not, the plight of hundreds of millions in the country subjected to high prices of all articles of daily consumption has evoked relatively little attention. It has tried to get away saying “supply side constraints”. Yet, some more drastic measures of market intervention could have been attempted to enforce a decline in food prices attributable largely to hoarding by wholesale traders and dictating the level of prices in the retail markets.

Now the ball is in RBI's court. While the first quarter review is scheduled for July 27, RBI has always kept an option for “swift and effective” response to developments as warranted. Most analysts expect some hardening of the monetary stance well ahead of July 27. Currently there is a temporary liquidity mismatch after the heavy borrowings related to 3G auction payments of the order of Rs..67,000 crores. There has been a sharp decline in deposit aggregation in the banking system over months (reflecting the poor return for depositors) while an equally sharp rise in credit offtake has been taking place more recently. Partly this may be in anticipation of a rate rise with inflation rate ratcheting up. There is no doubt RBI will come out with an adequate response to meet the immediate situation in a matter of days.

Growth pointers in the economy are all robust. After recovering to 10.4 per cent in 2009/10 from 2.8 per cent in the previous year, industry recorded an expansion of 17.6 per cent in April.. Exports are picking up though slowly in the context of a far from reassuring outlook for global demand revival in the near future. India's growth is projected at 8.8 per cent in 2010 by IMF as against Government's own target of 8.5 per cent. Fiscally, Government is better placed to contain the deficit with the one-off 3G raisings. But IMF has also projected consumer price inflation - the universal norm - at 13.2 per cent in 2010/11.

Apart from inflation, the Government, faced with more challenges, mostly internal, than during its first year, will have difficulty in pushing through reforms relating to financial sector as well as subsidy reduction including oil price reforms. Known dissent on disinvestment and on oil price hikes within the ruling alliance would make the going tough. Major issues have to be sorted out before it could enact food security legislation, a key electoral promise.

It is now being realised that unless the Public Distribution System is cleaned up, even the below poverty level millions would not be getting the foodgrains at the new concessional prices. But the rest of the population have no option but to pay the price of essential commodities, whatever market demands.. No matter occasional marginal decline in the index, food prices are not lowering but have not gone up further. Given inadequacies in our output of pulses and edible oils, prices are at extraordinarily high levels. Ditto for vegetables and fruits, let alone drugs. There is an across-the-board inflation leaving no product untouched.

If the right to food has to become universal, as apparently the Congress President Ms.Sonia Gandhi, who heads the reconstituted National Advisory Council (NAC) favours, it will be a massive challenge for government to raise food grain production, productivity per hectare, better storage than what the FCI has to its record, distribution and delivery safeguards for the vulnerable sections. There has to be an overhauling of the food economy.

In a sense, the food inflation has brought to the fore the distortions in our development strategy and our inability to take timely corrective measures for balanced growth. Fortunately, the NAC now comprises distinguished economists including Dr M S Swaminathan, whose own reports as Chairman of the National Agriculture Commission, during the first tenure of UPA had been gathering dust. Taken together with the threat to internal security from Naxals, Government has to re-work its strategy for districts in the grip of left-wing extremism, as Dr. Montek Ahluwalia realises and hopefully adds, “We have to look at the entire development strategy”. (IPA Service)