Global rating agency Moody's has said India's high food inflation is credit negative for the country as it hurts government finances and curtails the ability of the Reserve Bank of India (RBI) to
deal with monetary issues .
While Fitch and Standard and Poor's have downgraded their outlook on India to "negative" from "stable", Moody's Investors Service has assigned a "stable" outlook.
"Sustained food inflation is credit negative because it exacerbates India's macroeconomic challenges of slowing growth, high inflation and large fiscal and current account deficits," Moody's Investors Service said in credit outlook report.
The Wholesale Price Index for February showed that food prices increased by 11.4 per cent year-on-year, raising overall inflation for the month to 6.8 per cent, despite a deceleration in core inflation to 3.8 per cent.
Moody's said India's current pace of food inflation is faster than the global average.
"Moreover, although food inflation is not desirable anywhere, it has particularly
credit negative implications for India because of its economic structure and policy framework," it added.
Food inflation, it said, "hurts consumption, government finances, the balance of payments and monetary policy flexibility".
"Because the Indian government subsidises food for a large portion of the population, increases in food prices inflate government expenditure...and
the budget deficit, which is already high relative to comparable emerging markets," Moody's' said.
According to the credit ratings agency, food demand is unlikely to fall, and food supply is difficult to raise.
Moody's said that given growing incomes among India's 1.2 billion people, demand for food will continue to grow over the next several decades.
"And, demand will be further supported by social welfare policies, including food subsidies. Therefore, a significant deceleration in inflation depends on the food supply increasing," it said.
The agency said the food supply could rise if farmers respond to higher food prices with increased investment and productivity enhancements.
It added, however, that their chances of success are capped by Indias poor rural infrastructure, inefficient food distribution and storage systems, and most farmers' limited access to productivity enhancing technology and equipment.
With inputs from PTI
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