Hide and seek is the name of the game when it comes to defining inflation in India, in the past two years. In India, inflation has become smart political excuse to high growth, which neither seems high nor steady. Food inflation in India, as measured by food articles price index, has averaged 11.3% for the period FY09 to December 2012, with a maximum of 15.6% in 2010-11 and minimum of 7.3% in 2011-12.
The reasons for the persistently high food inflation of the last few years have been much debated. Many ascribe it to the rising incomes of Indians, which is leading to greater consumption and pushing up prices. Secondly, the growing penetration of big corporates in the food economy, international trade in food items and speculative futures trading in agricultural commodities has weakened the government's capacity to control food prices. There is also great need to improve supply chains and reduce wastage. Third, the rise in global food prices has also led to increase in domestic prices.
The government is hoping that their much talked about and possibly game changer scheme of direct cash transfer may help in reducing food inflation. A cash transfer scheme could potentially help prevent corruption through leakages and diversions (because there are no physical resources such as grains or medicines that need to be handled anymore). The Reserve Bank of India (RBI) has also welcomed the implementation of the scheme. The bank has said that this initiative will help reduce fiscal deficit, which in turn will also bring down inflation if implemented well. Direct transfer can stimulate the economy by increasing public spending due to cash actually reaching the hands of the beneficiaries. This stimulation effect could be significant given that estimates post the loss due to subsidy leakages at nearly 40%. Hopefully, action on these policy fronts can tame this monster of food inflation that is eroding the confidence of India growth story.