In his first media interaction after assuming charge, Rajan justified the diesel price hike saying there is a need to link domestic fuel prices with international rates to curb fiscal deficit.
"One of the concerns of the last few years has been food inflation, which has been not so much within the control of the government, but which has been sort of because our population has become richer, a good thing and therefore demanded more sort of higher end food products like, milk, egg, meat rather than the old cereals," he said.
Food inflation has hovered above the 10 per cent mark for most part of the current fiscal, only to decline to 9.14 per cent in August. The overall inflation stood at 7.55 per cent.
"In order to rebalance or reduce food inflation we have to produce more of that. Which means more productivity. So productivity is going to be part of the fight against inflation," he said.
Rajan said the less sowing of kharif food grain would put "upward pressure" on prices.
Country's foodgrains production is projected to decline by 10 per cent in the kharif season of this year at 117.18 million tonnes due to deficient monsoon and drought in some states.
On the government's recent decision to hike diesel prices by over Rs 5 a litre, Rajan said "the best policy is to move towards true cost of the fuel ... If you can not move prices towards international level then you may resort to differential tax on vehicle".
I believe we have enough food production, the problem lies in Supply. While the consumer pays very high price for the food items, the farmers are getting very less. We might need some system like Amul to prevent the middle men.
I have a lot of respect for Raghuram Rajan of the Chicago school. Let him not jump to conclusions based on the Planning commision's old views. The large amount of money supply increase due to government social programs like NREGA, means that without food supply having improved, food demand has gone up. A study of the constituents of the food basket will reveal that basic items like vegetables etc have gone up. Thus the solution is not through monetary policy but through the short term import (we have enough FX reserves)of good grains till action is taken to improve domestic food supply. Government policies are directly responsible for the availability of demand, mostly from rural India and small towns. I am not saying social programs are bad, but the cause must be recognized and food imports used to bring down prices.