subir gokarn : food inflation – this time it ’ s different text of the kale memorial lecture by dr subir gokarn, deputy governor of the reserve bank of india, at the gokhale institute of politics and economics, pune, 9 december 2011. * * * inputs from bhupal singh and g. v. nadhanael are gratefully acknowledged as well as the inputs on climate change from indrajit roy. i would like to thank prof. parchure for inviting me to deliver this year ’ s kale memorial lecture. the lecture has been instituted to honour rao saheb r. r. kale, who was instrumental in setting up this great institution, the gokhale institute of economics and politics. despite his professional achievements as a lawyer, he was apparently a rather modest and humble person. given his financial contribution to the establishment of the institution, it would have seemed perfectly appropriate for it to have been named after him. but, he demurred and it was named after gopalkrishna gokhale, a somewhat more recognizable name for readers of indian history. while rao saheb kale ’ s name may not adorn the institution, the attributes that he is given credit for are the foundations for any activity to be sustainable and effective. i feel very honoured and privileged to be delivering this lecture in his memory. i am also very pleased to be speaking at the gokhale institute itself. many of my colleagues over the years are alumni of the institute and i always enjoyed my interactions and collaborations with them and appreciated and valued their understanding and insights. besides, the institute has a reserve bank of india chair, which we are very glad to have prof. parchure occupying at a time when we are strategically increasing our level of engagement and two - way knowledge transfer with the chair professors across the country. turning to the topic of today ’ s lecture, the title is admittedly borrowed from a recent book, the very influential historical work on financial crisis by carmen reinhart and kenneth rogoff1. besides being a very catchy title, which is always very tempting to borrow, i felt that there was some similarity between the historical dynamic described in the book and the situation we are facing with food inflation in india today. crises recur because there are just enough differences between the circumstances that cause them for people to be able to deny their inevitability. however, the underlying drivers of virtually every crisis are essentially similar

of the previous decade, during which productivity increased quite significantly. productivity gains can be a significant contributor to moderating food inflation. however, for given levels of productivity, it is the cost of major inputs that determines the prices of the products. what is driving costs of production? in discussing this, although i have been talking about proteins and fruits and vegetables all along, i will use paddy as an illustration, for two reasons. the first reason is that paddy is cultivated across a wide range of states and its cost structure therefore reflects national trends. the relative share of different inputs in the cost of paddy cultivation is shown on slide 15. in terms of cost share, the dominant input clearly is labour. it ’ s contribution varies across states, but it is by far the largest component of costs in all the states displayed. consequently, the cost of production across the country will depend on how the wages of agricultural labour have been moving. the movement in this critical variable is shown in slide 16. the longer bars reflect the increase in nominal wages of rural unskilled workers over the past year. the shorter bars reflect the change in the consumer price index for this category of workers. in virtually all the states, the rise in nominal wages far outstrips the increase in consumer prices. labour costs bis central bankers ’ speeches are clearly rising sharply, which for commodities like food usually mean a high degree of pass - through into the selling price. the broader point here is that, if wages are rising at current rates, for whatever reason, they will exert strong pressure on the prices of all agricultural commodities for which wage costs are a dominant component of the cost structure. i must point out that, from a larger development perspective, rising wage costs are actually a good thing. after all, a primary objective of development is to raise standards of living through higher incomes. however, the sustainability of the process depends entirely on whether wage increases are the consequence of productivity increases. wages rising faster than productivity can only result in rising prices, if producers cannot substitute other inputs for labour. the cost structure for paddy reflects the criticality of labour. there may be substitution possibilities for other crops, but these depend on many factors, such as the scale of cultivation, the quality of infrastructure services and so on. in many commodities, rising wages combined with stagnant productivity are a recipe for persistent price increases. the second reason why i used paddy as an example here is to highlight an important relationship between price dynamics and stocks. as is