Frozen carrots: The weapon in India's inflation war

Updated: 2015-05-27 07:18

By Bloomberg(China Daily USA)

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The workers extracting mango pulp, freezing carrots and packing spring rolls in southern India are the foot soldiers in Indian Prime Minister Narendra Modi's inflation war.

The complex is one of four government-backed "mega food parks" intended to jumpstart a nascent food processing industry. Modi plans to help build another 38 to reduce wastage that sees a third of all fruits and vegetables tossed in the trash, pushing up prices for India's 1.2 billion people.

The effort is more crucial than ever after his government agreed with the central bank to target consumer price inflation at about 4 percent in the next few years. Since food prices account for about half of India's CPI basket, Reserve Bank of India Governor Raghuram Rajan has little scope to reduce interest rates if they aren't contained.

"If it doesn't get any clear indication of food reform, then I'm afraid the RBI just needs to hold tight," said Pranjul Bhandari, an economist at HSBC Holdings Plc. Long-term measures to bring down food costs are the only way to reduce inflation "without killing growth" as demand picks up, she said.

Food prices are one of the key indicators Rajan will consider next week when deciding whether to reduce India's benchmark rate from 7.5 percent, one of the highest in Asia. Consumer inflation fell to 4.87 percent in April, a four-month low and well within his target of 6 percent by January.

It may get harder from here on. Oil prices are creeping back up and demand may accelerate along with economic growth, adding to price pressures.

Modi has taken short-term steps to control food prices during his first year in office. These include selling some of the nation's wheat stocks on the open market, pushing states to let farmers sell fruits and vegetables directly to consumers, and capping growth of guaranteed prices for cereal crops.

"They have been very proactive," said Gautam Chhaochharia, an analyst with UBS Group AG in Mumbai. "They realize that bringing inflation down at a lower level is critical for long-term economic recovery."

Processing more food is one of many longer term prescriptions for fixing India's agricultural sector. A lack of refrigerated storage and transportation means that farmers often sell goods quickly to middlemen who can manipulate prices.

"Reducing the supply-demand gap in agriculture production in the long-run and improving supply logistics will be of utmost importance for assuaging food price pressures," said a working paper published by the Reserve Bank of India in October.

Frozen carrots: The weapon in India's inflation war

(China Daily USA 05/27/2015 page16)