For countries battling inflation in the wake of “a sustained and synchronised upward trend” in food and oil prices, the return of the food and fuel crises presages hard options, including lowering of the growth prospects of the economy.

Highlighting this concern, this year's Economic and Social Survey of Asia and the Pacific of the Bangkok-based UN Economic and Social Commission for Asia and the Pacific (Escap) estimates that oil price increases would reduce growth by up to one percentage point in some developing Asia-Pacific economies and exert pressure on inflation and adversely affect current accounts.

With average crude prices in the range of $118 a barrel, a heavily oil import-dependent country like India has little option other than seeing inflation and current account deficit inching up uncomfortably in the months ahead unless domestic oil and product prices undergo upward revision or conservation gains a conscious upper-hand, policy analysts say. This would be inevitable as high oil prices would augment costs for domestic industry and push up the price of imports and reduce demand for exports.

Food prices

ESCAP said food prices have increased in various countries by up to 35 per cent. Even as adverse climatic conditions have hit supply in many countries, increasing conversion of food crops in bio fuels, export bans, hoarding and heightened speculative activity in food commodities, backed by the massive injection of liquidity of the advanced countries, have “exaggerated” the price surge. But in India except for diversion of food crops into bio-fuels, all other factors cited by Escap played decisive parts in the unrelenting rise in food inflation.

The survey rightly recalled that developing East Asian countries with large food components in household budgets had successfully moderated food inflation by focusing on raising agricultural productivity. In a plain indictment of lack of governance in food policy, ESACP drew attention to India's early move to agricultural subsidies together with implicit taxes generated through the imposition of restrictions on different activities within the farm sector. Procurement prices were raised with the rise in border prices but did not fall with them, thus imparting generalised cost-push pressures in the economy and fostering needlessly mammoth food stocks “in costly and dysfunctional food support programmes.”

How far and fast the Food Corporation of India piled up foodgrains stocks — a substantial quantity of which were rotting in the unkempt godowns — needs no recounting, reflecting how the focus has not been on disposing of the stocks through innovative schemes that target the really needy. Experiment with food coupon and cash transfers directly to poor households remain still unexplored in India, while the blanket ban on futures markets — which help output planning through better information on future demand and supply and the hedging of risk — is not proving to be a pragmatic remedy to food inflation.

According to the survey, depending on the degree of pass-through of food price inflation to prices of other products and to related wage demands, Governments in the region might respond with monetary policy, as India has been on course in tightening the monetary screws. But Escap asks all its assorted members to address supply-side causes of food price spurts. It seeks global cooperation through the UN and the G-20 to curb financial speculation in food commodities and to regulate the diversion of food for bio fuels. India, being part of the G-20, should back ESCAP's proposal to act decisively to moderate the volatility of oil and food prices, “which are highly disruptive to efforts to achieve sustainable development.”

> geeyes@thehindu.co.in

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