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It’s All About Food: The IMF’s Advice to Defeat India Inflation

  • New book calls for higher crop yields, better stock management
  • Monetary policy needs to remain tight until measures roll out

India’s biggest enemy in the war on inflation is food, according to the International Monetary Fund.

Central bank Governor Raghuram Rajan will have little room to lower one of Asia’s highest interest rates unless Prime Minister Narendra Modi boosts food supply, according to a new book published by the IMF. Rising incomes, stagnant crop production growth and poor management of buffer stocks have spurred food inflation in the world’s second-most populous country, it said.

“The sustainability of a long-term inflation target of 4 percent under the recently adopted flexible inflation targeting will depend on enhancing food supply, agricultural market-based pricing, and reducing price distortions,” Rahul Anand, Naresh Kumar and Volodymyr Tulin wrote in a chapter on food’s contribution to price pressures. “In the interim, monetary policy will need to remain tight to anchor inflation expectations at a lower level.”

Rajan’s room to ease policy after four rate cuts last year is narrowing, putting more pressure on Modi to fix supply issues to control price gains. That job has become harder after back-to-back droughts eroded harvests and prompted the government to roll out measures to boost rural incomes in its latest fiscal budget.

IMF staff see inflation averaging 5.3 percent in the year through March 2017 from an estimated 5 percent in the previous period, and had said in a separate report the central bank should stand ready to raise rates if price pressures pick up. Rajan is looking to keep consumer-price gains within 5 percent by March 2017 and 4 percent a year later.

The IMF book, “Taming Indian Inflation,” recommends the following on food supply:

Boost Productivity

  • Yields in key commodities must improve as accelerating economic growth stokes demand for food
  • India trails other emerging markets, with rice yields a third of China’s and half of Vietnam’s
  • Farmers have been slow to adopt technology and improved seed varieties in cereal production

Management of Buffer Stocks

  • The government should shift to open market sales of cereal stocks held by Food Corporation of India, which swelled in recent years
  • Releasing more grains in a year of low production and increasing reserves during a good year would stabilize both consumption and market prices of cereals

Guaranteed Prices for Crops

  • The book says the government’s minimum purchase prices “constitute an important impediment to monetary policy transmission and will continue to pose challenges for monetary policy management in India”
  • Modi has curbed increases in guaranteed prices since taking office in 2014, one of several steps the IMF said will help contain inflation in the near-term, until more durable measures are taken
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