Growing wealth of rural poor blamed for India’s food inflation

In an address on the RBI’s perspectives on India’s macroeconomic challenges, Subbarao said that poor segments of the population had been seeing an increase in income, which in turn has led to a change in their dietary habits. 

He noted that the three big factors keeping inflation levels high were food prices, global commodity prices, particularly of oil and gold, and demand pressures. 

Income growth​

"Today we are seeing structural food inflation. The poorer segments of the population are seeing an increase in their incomes, and consequently their dietary habits are changing. People are shifting from cereals to proteins​," Subbarao said.  

"People are eating more eggs, meat, milk, vegetables, pulses, and fruits. This shift in food habits from cereals to proteins is what's causing food inflation​," he told the gathering.

"Now we have evidence. Over the last five years, rural wages have grown by 20% each year... which is a remarkable success story​." 

However, he added that when the income of poor people rises, almost all of that increase goes for consumption, thereby leading to demand pressures.

Politicians across a spectrum of parties, including the BJP and Congress, have roundly condemned the remarks, claiming that Subbarao had insulted the poor.

Scathing report​

Last week, a discussion paper titled Taming Food Inflation in India​ by the Commission for Agricultural Costs and Price (CACP), which sets minimum support prices for foodgrains, stoked the food inflation debate. 

“Food inflation in India has been a major challenge to policy makers, more so during recent years when it has averaged 10% during 2008-09 to December 2012. Given that an average household in India still spends almost half of its expenditure on food, and the poor around 60%, and that the poor cannot easily hedge against inflation, high food inflation inflicts a strong ‘hidden tax’ on the poor​,” the report said. “[Over] the last five years, post-2008, food inflation contributed to over 41% to the overall inflation in the country​.”

During the period 2008-09 to December 2012, wholesale price inflation, a measure of the overall rise in prices, averaged 7.4%; over the same period the food inflation averaged 10.13% per year.

The authors put the blame on the government “for having launched a pre-election spending spree in 2008, which continued even thereafter​.”