'Inflation curbs RBI monetary initiatives'

The international rating agency Moody’s on Monday said India’s high food inflation is credit negative for the country as it hurts government finances and curtails the ability of the Reserved Bank of India to deal with monetary issues.

Moody’s Investors Service in its credit outlook report said, “Sustained food inflation is credit negative because it exacerbates India’s macroeconomic challenges of slowing growth, high inflation and large fiscal and current account deficits.” Simply put, the Union government subsidises food for a large portion of its 120 crore population that eats into its finances and inflates budget deficit. The country’s budget gap stands at 5.2 per cent of gross domestic product (GDP) this fiscal ending March 31, slightly lower than the 5.3 per cent projected earlier by the finance ministry.

Other rating agencies such as Fitch and Standard and Poor's have downgraded their outlook on India to "negative" from "stable", Moody's Investors Service has assigned a "stable" outlook. Data issued last week showed food inflation remained over 11 per cent for the second straight month in February as prices of protein-rich foods such as eggs, fish and meat as well as those of vegetables including onions and potatoes rose sharply.
The Wholesale Price Index for February showed that food prices increased by 11.4 per cent year-on-year, raising overall inflation for the month to 6.8 per cent, despite a deceleration in core inflation to 3.8 per cent.

Moody's pointed out that India's current pace of food inflation is faster than the global average. "Moreover, although food inflation is not desirable anywhere, it has particularly credit negative implications for India because of its economic structure and policy framework," it added.

Food inflation "hurts consumption, government finances, the balance of payments and monetary policy flexibility," Moody's said adding, "..as the Indian government subsidises food for a large portion of the population, increases in food prices inflate government expenditure... and the budget deficit, which is already high relative to comparable emerging markets." 

As per the credit ratings agency, food demand is unlikely to fall and food supply is difficult to raise. Food accounts for more than half of average household spending in India, of which rural households spend 57 per cent and urban homes 44 per cent on food. Among the country's poorest rural households, that ratio rises to 65 per cent, Moody's said.