Food inflation only part of India’s economic problems

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India is having troubles with food prices in addition to feeding all its people in the face of major inflation. The rural economy and programs of the government are negatively influencing the availability of labor for city labor jobs while the country’s economic growth has slipped to 5 percent a year, the lowest in a decade.

Despite little evidence that interest rates can control food prices, India's new central bank chief, Raghuram Rajan, the former International Monetary Fund economist who took over as governor at the Reserve Bank of India (RBI) in September, has raised rates twice since taking over to prevent food-price inflation from spilling over into the wider economy. He has warned of another hike next month if prices don't cool significantly.

"India has become a high-cost economy," said Devendra Kumar Pant, chief economist at India Ratings & Research. "Persistently high inflation is a recipe for disaster."

Take onions, which figure in almost every Indian meal. Prices for onions shot up 190 percent to $1.60 a kilogram in the past year, making them more expensive in India than in the United States, where incomes are roughly 35 times higher. That helped push vegetable prices up 95 percent in the past year and pushed India's headline inflation rate in November to 7.5 percent, a 14-month high.

And while vegetable prices are expected to start easing next month following a bumper harvest, subsidized government purchases of grains and rising farming costs mean overall food inflation is not likely to slow down much.

Farming costs are also being driven higher by a government-run, rural employment guarantee program that uses public works projects to provide at least 100 days of guaranteed wage employment each financial year to each rural household with adult members willing to work on irrigation, reforestation, soil conservation and road construction.

Since its rollout in 2006, the program has helped boost livelihoods on poor Indian farms. In the largely rural state of Andhra Pradesh, according to one study, the program has enabled households to boost spending by a tenth, and raise spending on items other than food by almost a quarter.

Rural wage increases have jumped, from 2.7 percent a year before the program to 9.7 percent after its passage. Since 2009, nominal agricultural wages have climbed by more than a fifth a year, with non-farm rural wages up almost 17 percent.

Adding to wage inflation is a pickup in economic activity and job creation in laggard states of central and eastern India, which in the past used to be the main source of migrant labor.

With jobs and wages rising so fast, big cities offer less of a lure to rural workers. Estimates are that immigration of unskilled workers last year dropped by two-fifths. That's shutting down an important source of workers for industries that have come to rely on them, particularly the construction sector that accounts for 8 percent of India's GDP.

"Wages in states like Bihar are more or less comparable to those in Delhi," said Ram Kumar, a contractor who supplies workers to different construction projects around Gurgaon. "But the cost of living is much cheaper than Delhi. So there's not much to gain from coming to big cities."

Wages for blue-collar workers, skilled and unskilled, are growing by an estimated 15 percent a year, according to government data, faster than the 6 percent average inflation rate, but barely above the 13 percent average annual increase in food prices.

Construction workers have managed to do better, with wages rising at an average of 18 percent annually since 2009, according to data from India's Construction Industry Development Council, a joint government-private sector body.

"Inflation is leading to the need to increase wages," said Kumar Gera, Chairman at Gera Developments, a real estate developer in western India. "When workers come and tell you they can't afford essential food items with what they are earning, you have to raise wages."

To retain workers, some companies provide canteens with free food, clinics and even day-care and schools, in addition to on-site housing. Weak demand has so far not allowed developers to pass rising labor costs on to buyers, but that appears certain to change.

Rajan Kale, a tendering manager at port and road builder Man Infraconstruction Ltd., said rising wages trimmed the company's net profit by about 2 percent last year, contributing to an overall 34 percent drop in profit. His company plans to start including annual wage increases of up to 15 percent into its project budgets, he said.


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