China Export Drop Limits Recovery As Food Stokes Inflation

A vendor waits for customers at his stall at a wholesale food market in Mumbai October 14, 2013. REUTERS/Danish Siddiqui

India’s inflation data comes on the heels of Friday’s disappointing industrial output numbers. Output grew a much-slower-than expected 0.6 percent in August, hurt by weak investment and consumer demand, dashing hopes of an economic rebound by the end of the year. STAGFLATION? The data fills out a picture of high inflation and weak growth in Asia’s third-largest economy, which some analysts define as akin to stagflation. India is struggling to lift its economic growth rate, which hit a decade-low of 5 percent in the fiscal year that ended in March. But Rajan has clearly signaled that he will focus on price stability, which he sees as a necessary condition for raising the rate of growth. Higher interest rates are likely to further dent hopes of faster growth, however. That will be a worry for Prime Minister Manmohan Singh’s Congress party as it campaigns for five state elections starting in November, a warm up for national elections due by next May. The opposition Bharatiya Janata Party has gained momentum in recent months thanks in part to the performance of the economy under Singh, a veteran economist and reformer. RISKS Inflation is expected to come down in coming months as a slowing economy is likely to keep demand-driven price pressures in check and as this summer’s strong monsoon rains may eventually cool food prices. Yet, price risks persist. Adjustments in domestic prices of subsidized fuel and other imported items following a sharp depreciation of the rupee are still incomplete. Although the rupee gained 5 percent last month, it is still down around 10 percent this year against the dollar, meaning higher import costs for items such as oil, fertilizer, pulses and edible oil in rupee terms.

Lessons in refining food aid from ‘Captain Phillips’

in Beijing, who previously worked at the World Bank . If that happens, it will result in very weak growth starting next year. Yuan Gains The yuan strengthened 0.2 percent against the dollar after the central bank raised the currencys reference rate to a record, while Chinas benchmark money-market rate declined for a third day. The Shanghai Composite Index of stocks rose 0.4 percent. The increase in Chinas consumer-price index compares with the 2.8 percent median estimate of 44 economists in a Bloomberg survey , after a 2.6 percent gain in August. The decline in the producer-price index narrowed to 1.3 percent from 1.6 percent the previous month. The government is targeting 3.5 percent consumer inflation for the year. As the inflationary pressure has picked up, the central bank is unlikely to change the tightening bias in monetary policy for the rest of the year, Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong , said in a note today. New yuan loans in September were 787 billion yuan ($129 billion), the Peoples Bank of China said, compared with the 675 billion yuan median analyst estimate. Money-supply growth slowed to 14.2 percent while the broadest measure of credit, aggregate financing, fell from a year earlier to 1.4 trillion yuan. Forex Reserves Chinas foreign-exchange reserves, the worlds largest, rose to $3.66 trillion in September from Junes $3.5 trillion, the biggest quarterly gain in more than two years, central bank data showed. The pickup in Septembers CPI was driven by eggs, vegetables, fruits and pork, as well as non-food items including fuel and tourism, according to a statistics bureau statement citing statistician Yu Qiumei. Non-food prices rose 1.6 percent in September, below a 2 percent pace for a 20th month.

`Quite a Lot

food aid (and, in practice, usually more) must be monetized. This means that once a U.S.-flagged vessel gets the commodities to Africa, they are resold on local markets by nongovernmental organizations, which use the cash to fund development projects. Monetization makes about as much sense as mailing your temporarily broke pal a large parcel of food with instructions to sell it and spend the proceeds on job training. In 2011, the Government Accountability Office found that, over a three-year period, the program resulted in $219 million being spent on commodities and shipping that otherwise would have been available for development projects. For all these reasons, President Obama proposed a wide-ranging reform of U.S. food aid programs in his 2014 budget , which was unveiled in April with bipartisan support in the form of a strong endorsement from House Foreign Affairs Committee Chairman Ed Royce (R-Calif.). The plan would have eliminated monetization, permitted greater purchases of locally grown commodities and reduced the preference for shipping on U.S.-flagged vessels . The idea was to help an additional 2 million to 4 million people, at about the same cost as the current programs . Alas, there is no Hollywood ending to this story. Reform legislation has been blocked by the farm and maritime lobbies and the lawmakers from rural and coastal states who do their bidding. Supporters of the status quo certainly cant win the policy arguments. U.S. agricultures case against reform is especially weak; that heavily subsidized sector is booming, thanks in large part to commercial exports.

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