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The fact of the matter is, it already has. Upward trend in the food prices continued well into 2009-10, effectively clocking a rise of around 20% at its pinnacle in December before abating a little.

Pulses, vegetables, oilseeds, fruits and Milk have been the primary forces behind such a ferocious rise. A massive correction in the prices of these commodities is ruled out as most of them are struggling to witness a requisite push up in the supplies even as aggregate demand continues to tick up. Despite the current slide in the comprehensive food basket, Pulses, Vegetables, Cereals and Fruits have rose at 35.23%, 15.45%, 11.58% and 10.41%- figures that could be termed high by any standard. This is surely to eat into the purchasing powers of the consumers just at a time when the negative wealth effects triggered by the great global crash of 2008 start of wear off. What's more, the RBI has switched to a tight money mode and the borrowing costs are likely to rush forward from hereon, leading to a rise in the overall prices.

Stagnant food grains production over a period of time has been the main reason for the overwhelming problem of inflation. The food prices rose in a similar fashion in 2006-07, despite a robust 6% agricultural growth during 2005-06. The prices did come down thereafter, extending the slide into much of 2007 and early months of 2008 as well. The food prices resumed their upward trajectory soon after and went into a high gear by the middle of 2008- even as the global commodity prices slid. This clearly indicates that the inflation problem is not incipient of last year's weather troubles, but has been simmering below the surface for years.

When food prices surged menacingly in 2006-7, the Economic Survey of 2006-07, while admitting the farm sector's depressing performance, stated that the low level of public investment, exhaustion of the potential of new high yielding varieties of wheat and rice, unbalanced fertilizer use, low seeds replacement rate, an inadequate incentive system and low post-harvest value addition were contributing to lackluster agricultural growth during the new millennium. Most of these obstacles still remain well in place. The most critical of the lot, capex has been in a swoon, effectively keeping the mismatch between the output and demand constantly on the up, increasing the country's dependence on costly imports. This is particularly true in case of items like edible oils and pulses.

The total investment in the agriculture sector has gone up from Rs 78848 crores in 2004-05 to Rs 138597 crores in 2008-09. However, in terms of the share in total investment, the public investment has come down from 20.50% to 17.6% while that of the private investment has crawled up from 79.50% to merely 82.40% during the same time. This reflects that agricultural product prices would continue to stay higher even if the out shows a moderate pick up.

The government has recently approved 8% hike in dearness allowance (DA) for government employees and pensioners with effect from 1 January 2010, increasing the discretionary income in the economy. Growth in agriculture production dropped to 1.6% in 2008-09 and is estimated to post a decline of 0.2% in 2009-10 due to poor rains affecting kharif crops. We could be in for a sustained period of price spiral on the food front and the worries might not abate despite a robust Rabi harvest as the root causes go much beyond that.

Concluded.

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* Contributed by: -
Sachin Dabhade, is a Post Graduate in Finance from Sydenham Institute Of Management, Maharastra. Currently he is Working at Capital Market Publications Pvt. Ltd. as Senior Analyst - Commodities.