NEW DELHI: Moderation in inflation numbers may have provided some short-term relief for the Narendra Modi administration as it launches its act to revive the economy. But challenges on the inflation front are far from over and there are looming worries over prices, which could act as an obstacle for the BJP-led government’s roadmap to help put the economy back on track.

While Modi has made it clear that tough decisions are needed to restore the health of government finances and revive the economy, he will need to focus on a clear strategy to tame food inflation, which has remained a challenge for the past three to four years. This would require both short-term and long-term measures to improve supplies and create both back-end and front-end infrastructure in the farm sector to tackle the problem head on. This would be an uphill task and the government will have to bring states on board to revamp laws, which hinder movement of farm supplies.

The latest retail inflation data showed some moderation but the consumer food price inflation hovered around double digits at 9.6% year-on-year in May. Price increase rates for fruits, egg, fish, meat, milk, milk products and vegetables were in double digits. Prices of potatoes and onions have started firming up and during monsoons vegetable prices spike due to supply obstacles.

According to Ashok Gulati, professor at ICRIER, the consumer food price index has averaged 11.5% for the past three years, which highlighted the stress in food prices. “Liquidate some of the excess stock, urgently reform the APMC Act to ensure stable supplies,” Gulati said. For the short term, the government could also examine reducing import tariff on some food items. For instance, import tariff on chicken legs is pegged at 100%, skimmed milk powder 60%, apple 50% and garlic 100%.

For the long term, massive investments would be needed to create the infrastructure to ensure stable supplies. For this, the government will need to attract private investments and, according to Gulati, incentives such as tax holidays may have to be worked out.

The immediate challenge confronting the government is the prospect of patchy monsoon rains due to the El-Nino weather phenomena. While it is too early to predict the outcome of the Southwest monsoon, early estimates show that it would be below normal. This would require steps to ensure supplies, fodder and relief for farmers. Fortunately, the government has enough food grain stocks to deal with the situation.

Former RBI governor Bimal Jalan said taming inflation would also require keeping a check on the fiscal deficit. “There is a soft side and hard side to revive the economy,” he said.

Economists say the Reserve Bank of India may not ease interest rates soon as it will prefer to watch the government policy action in the Budget and the movement in monsoon rains.

“If rains are normal, CPI inflation should come off to 7-7.5% by March 2015. If the El Nino impacts the kharif harvest, rising food prices will push up CPI inflation to 8-10%, pretty much irrespective of monetary policy action. A 5% change in food prices impacts CPI inflation by 250 basis points. This will likely to push back RBI rate cuts to early 2015,” said Indranil Sengupta, economist at BofA Merrill Lynch, in a research report.