Chindia: High Food Prices Take a Bite

It's partly due to weather, but a spike in the cost of food is starting to boost inflation and exacerbate income gaps in both China and India

Inflation has been a huge preoccupation for rich world economies such as the U.S. and Europe over the past year. Yet it's also a mega-concern inside the two current star performers of the global economy—China and India. And particularly disturbing for both countries, which still have huge numbers of families barely making ends meet, is the surprising spike in food prices.

The Chinese government reported on Mar. 13 that February consumer prices advanced 2.7% year-on-year after gaining 2.2% in January. About one-third of China's consumer price index (CPI) is weighted toward food prices, which actually jumped 6% year-on-year.

In India, the situation is even more alarming. The key inflation number in India is the wholesale price index, which shot up 6.7% year-on-year in February and is also a third weighted to food. "Primary food articles such as rice, wheat, pulses (used in food products and animal feed), and oilseeds have been the main driver of inflation" in India, Lehman Brothers analysts Sonal Varma and Rob Subbaraman noted in a Mar. 9 report.

Poor Warehousing's a Factor

Part of the trouble in India is that challenging weather patterns this year and disappointing agricultural production numbers are coming at a time of increased consumer demand—hence the runup in key food price categories. India's food sector is also in dire need of investment. By some estimates, roughly 30% of the nation's crops is lost to rotting due to inadequate warehousing facilities. Rising food prices "is also an outcome of low agricultural productivity," says Chetan Ahya, economist for India and South Asia at Morgan Stanley.

Both China and India, though, are suffering impacts from the international shortage of wheat, thanks to a prolonged drought in Australia. In fact, wheat prices have been clocking 12% annualized growth this year according to Lehman Brothers, and that is feeding into the inflation outlook in both countries.

Unchecked inflationary pressures could pose real headaches for the governments of Chinese President Hu Jintao and Indian Prime Minister Manmohan Singh. Social unrest in China has been rising in recent years, particularly among rural Chinese who are most vulnerable to increases in food prices because their incomes badly lag behind those of citizens in prospering urban centers.

More Monetary Tightening

Increased monetary tightening to stamp out inflation is considered likely in China. Already the People's Bank of China has raised the reserve requirements on mainland lenders to try to slow an economy that is expected to grow at or near double-digit rates in 2007 after expanding 10.7% in 2006, vs. 10.4% in 2005. On Mar. 12 China reported a 52% year-on-year jump in its February global exports and a near-record monthly trade surplus of $23.7 billion.

Prime Minister Singh and his ruling Congress Party have fared badly in two of the last three recent state assembly elections, partially due to the income gap in an otherwise prospering India, with an economy now growing at a 9%-plus rate. India has been steadily raising short-term lending rates to keep inflation in check, while at the same time cutting import duties on foodstuffs from abroad to moderate price increases.

Wresting down the inflation in food prices is a big political priority. On Feb. 28 Finance Minister Palaniappan Chidambaram unveiled a new budget that will boost spending on the agricultural sector. "The agricultural budget was largely geared toward the forthcoming elections," says Rajiv Lall, managing director of the Infrastructure Development Finance Corp.