Govt action can bring down prices at retail level

Last week was an extra-ordinary week when the people of India were confronted with contradictory news on economic growth and inflation. Finance Minister Nirmala Sitharaman gloated about the reviving economy in parliament and only the next day the data revealed exactly the opposite.

The most significant was about the price rise, which she said, her government was able to contain in a better way than the previous government, which ruled the country six years ago. She was not totally wrong but ask the common man on the street and he would refuse to believe her claim.

The reason – one has never faced these sky-high rates of onions, garlic, potatoes, milk, meat, cheese, eggs, pulses and rest of the kitchen staples. What compounds the problem is the extreme weather conditions. Green vegetables, the prices of which generally cool in winter months, too have stayed hot, selling at 50% higher rates than last year.

However, a close look on the price rise would suggest that the government intervention could easily take half the burden off the common man’s shoulder.

The inflation data month over a month shows that there is a widening gap between prices at the wholesale level and retail level. For, example, in January, the overall wholesale price inflation was a little above 3%, while the retail inflation shot up to 7.6%. Though both moved up due to higher food and vegetable prices, the data suggested that the prices of the same commodities were almost 4.5 percentage points lower at the wholesale level than at the retail level. That means they sold at nearly half the rate in the wholesale market than in the retail shops.

Data shows the divergence between wholesale and retail prices has been continuing for months. Of late, it has become stark. Potato, onion, milk, garlic, and cereals contributed 183 basis points increase in headline retail inflation.

The major reason for that is the supply chain bottlenecks which impede the process of smooth distribution of goods. Post-production hurdles at several levels including storage, packaging, marketing, and infrastructure jack up prices at the retail level. The supply-side constraints can only be addressed by the government through better infrastructure and management, while the Reserve Bank of India is keeping a tab on policy levers to tame inflation.

A State Bank of India research has warned that the global food prices, which have jumped to double digits in January, will make it difficult for India to keep a tab on soaring food prices. ICRA has flagged the risk to inflation in imported commodities due to an increase in customs duty on many products in the recent budget. Besides, the recent hike of close to Rs 150 per cylinder on cooking gas, is expected to stoke rural inflation all over again. Experts have also cautioned against the supply chain disruption arising out of coronavirus-hit China, which could raise inflation in manufacturing products.

The other reason for prices firming up at the retail level is the presence of mediators from the farm gate to consumers, which not only delay the delivery of food or vegetable but also inflate the final price. SBI has also expressed dismay over rising prices of cereal in the retail market despite the government having a decent buffer of wheat and rice in its stock.