Falling food prices: A double edged sword

New Delhi, Oct 25: Fall in food prices in the past few months may have helped the government to keep the inflation under check, but it also presents a budgetary problem to the policy makers in terms of spending.

Good harvest and increased farm output, which have kept the food prices down, is in a way double edged sword. The subdued inflation numbers due to low food prices means that the government will have to shell out more to compensate farmers for low market prices of some crops. The government is committed to this due to its MSP policy and PM Modi's aim to double farm incomes by 2022.

Budgetery problems apart, inflation under control is good for consumers. Inflation in paddy, milk and oilseeds declined while that in cereals, wheat and potato increased to 5.54%, 8.87% and 80.13%, respectively, the data release last week showed. In the wholesale basket, the pace of decline in inflation slowed for onions, and eggs and meat.

Many had expected the inflation to soar with rising crude prices as oil prices and inflation are often seen as being connected in a cause-and-effect relationship. As oil prices move up or down, inflation follows in the same direction. Higher crude prices will adversely affect the twin deficits-fiscal and current account deficit-of the economy, which will have spillover impact on the monetary policy, and consumption and investment behaviour in the economy.

Inflation, put in layman terms, is something that effects the price of commodities in the market. If inflation is in check, it means that government is in control of price rise. It is a good news to the consumers, but it is a problem for the government in terms of spending.

India's Wholesale Price Index (WPI) or wholesale inflation surged to 5.13% in September 2018 from 4.53% in August this year. The annual growth in wholesale price index (WPI) in the quarter ending September 2018 was 4.98%. The Consumer Price Index (CPI) grew at 3.88% in this period, after having grown at more than 4% in the last three quarters.

While earlier the Reserve Bank of India used WPI inflation to manage monetary policy expectations, it is now the CPI inflation which is largely taken into account. For the common man it is always better to keep retail inflation which is the CPI or the Comsumer Price Inflation number in mind. It is a better measurement of what is largely happening with consumer prices.