Food Inflation May Play Spoilsport in Asia This Year

by V Kumar in Economics, January 9, 2011

Asia led the global economic recovery in 2009. However, the recent developments have reinforced the fears that inflation may play a spoilsport in this recovery. China has recently raised interest rates to curb inflationary pressures, and in India, fears of similar reaction have already begin to translate in landslide fall in equity markets. The vagaries of nature seem to be adding to the misery, as the world gropes with the million dollar question of whether we can continue on the path of ‘government aided demand pulls’ any further. The answer may lie in understanding the various factors underlying inflation especially that of food articles, which is here to stay, and the earlier we understand and include it in our equations and expectations, the better prepared we will be in our policy making.

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Inflation worries in Asia

During the last couple of years, China, India and other Asian countries have been at the forefront of global economic recovery. To a certain extent, it was helped by certain non-economic dynamics. Rising population, increasing workforce, urbanisation and rural to urban migration, dilution of families and lesser number of dependents – all contributed to rising incomes and demand that made sure that economic growth in Asia continues in spite of the crisis, albeit at a slower pace. This inherent growth trajectory of their economies helped the governments in Asia, along with their Central Banks to join the global expansionary policies to counter the crisis. However, as we enter the New Year, there is an increasing perception that breaks will need to be put on some of those policies now. Views vary widely among analysts as to whether it is time to pull the reigns, but everyone would agree that a change in trajectory could seriously impact the economic fortunes the world over.

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Recently, China has increased interest rates, initiating fears that world’s second largest economy and the expected economic powerhouse of this century may not be able to continue with its growth record in future. Today, the world depends upon China not only for the cheap manufacturing but also for ensuring and maintained demand, especially of commodities. A slowdown of Chinese economy could be the greatest setback to the global economic recovery, and if it happens, it will happen largely due to inflation.

India, the other aspiring economic giant, is already looking at a potential political turmoil due to rising prices. Inflation is the greatest challenge faced by the Indian Government and in a volatile democracy, can quickly change the political fortunes. The primary cause of this local crisis is a rise in food prices, led by perishable items like vegetables, fruits, milk, eggs and meat. It is not that other goods and durable items are not part of this inflation, but in their case, it is more to compensate the falling value of rupee that is required to compensate for wages, and hence is of a significantly lower order.

In other countries too, inflation, and in particular food inflation has been growing to threatening levels. In most of them, it has not yet reached levels which can be threatening on its own. However, when combined with price escalation of fuel and assets, it is likely to evoke a response from the Governments. At the least, it will impact their ability to continue the policy of liberal bail-outs and easy liquidity, if faced with a decision.