Food inflation appears high because of base effect: Montek Singh Ahluwalia

Food inflation may see a further increase in the weeks to come, but that is no reason for alarm as the rise is more a result of low base effect, Planning Commission deputy chairman Montek Singh Ahluwalia said today.

As of May 29, food inflation stood at 16.74%. 

"It is quite possible when the data comes out on Thursday, you may see a little increase in food inflation. That is not the reason to worry. As you see the weeks go by, food inflation would come down again," Ahluwalia said here.

Ahluwalia attributed this possibility of low base last year, which means inflation at this time last year was quite low, which may make even a nominal price rise now look higher.

"That is because this time last year, food index had actually
fallen and then it began to rise very sharply," he said.

Prices of edibles had started rising last year, after food production was hit by poor monsoon that accounts for 80% of the annual rains the country receives.

Nearly 60% of area under cultivation is rain fed.

After peaking at over 20% in December, food inflation has fallen to 16 per cent level, but has been the main reason behind overall high wholesale prices-based inflation -- which entered double digit in May.

Ahluwalia said key to lower food inflation is a sensible fiscal and macro policy and a good harvest. 

Earlier this week, chief economic advisor Kaushik Basu had said food inflation has petered out. Food inflation remains at elevated level because inflation is calculated on yearly basis. Otherwise, food index is only marginally higher in May than in November, he had said.

To a separate question, Ahluwalia said the government's  borrowing programme would not be affected due to liquidity
crunch fuelled by debt raised by telecom companies for telecom
licences, besides payment of advance tax.

The government plans to borrow Rs 4.57 lakh crore this fiscal. The system is facing liquidity shortage due to over Rs 67,000 crore outgo towards payments for spectrum for 3G mobile services and another Rs 38,000 crore is due to payment towards spectrum for broadband wireless spectrum. 

Besides, corporates have been paying advance taxes for the first quarter this fiscal.

Ahluwalia said fiscal deficit will be very much in control. "I think with the good monsoon, which is very much on the cards, we are going to have fiscal deficit very much under control."

Fiscal deficit is projected to come down to 5% of GDP this fiscal compared to 6.6 per cent of GDP, helped by revenue mop up from 3G telecom and broadband license auction.

Fiscal deficit figures went awry after the government provided
stimulus to the economy by cutting taxes and upping public
expenditure since December 2008.

Against the targeted level of three per cent in the Fiscal Responsibility and Budget Management Act, fiscal deficit doubled to over 6 per cent during 2008-09.