Food inflation could give government sleepless nights

The erratic monsoons would mean that going forward most Indians would have to pay more for basic food items.

Inflation in the food basket was 11.5 per cent in July, compared to 4.55 per cent in June. This is largely due to untimely rains in April, and erratic monsoon so far (deficient in June and August, and bountiful in July). The spread has been quite inconsistent as compared to the Long Period Average (LPA). Going forward, most Indians may have to pay higher prices for basic food items.

Food inflation in July was primarily driven by higher prices of vegetables; but cereals, pulses, and spices also contributed to that.

The latest step by the government to manage the food inflation is the 20 per cent duty on export of parboiled non-basmati rice. There is a minimum export price of $1,200 per tonne on basmati rice also, and the Agriculture and Processed Food Products Export Development Authority (APEDA) must issue a certificate for the same.

Drivers of food Inflation

Pulses:

Inflation in pulses surged to 13.27 per cent in July driven by the high prices of arhar, moong, and urad.

As on September 1, the sown area under kharif pulses is 119.09 lakh hectare (ha), lower by 11.04 lakh ha than 2022. Scanty monsoon in pulse growing regions of Karnataka, Maharashtra, Madhya Pradesh, Uttar Pradesh, and Rajasthan may have an adverse impact on production of pulses. 

The Union government has been quite proactive for maintaining prices of pulses. On March 3, import duty on whole arhar was cut from 10 per cent to nil. On June 2, stock limits were imposed on arhar and urad, with wholesale traders, big retailers, small stores, and dal millers. 

Media reports suggest that the government may be considering imposing a stock limit on gram (chana). Chana’s case is rather unique as it has invited action from the government even when it may not have been warranted.

On August 16, 2021, the Securities and Exchange Board of India (SEBI), suspended the launch of any new contract of chana on the National Commodity and Derivatives Exchange (NCDEX), till further orders. In December 2021, the ban was extended for one year, which has now been further extended till December 20, 2023.

Chana prices have ruled below the minimum support price (MSP) (see graph below) and there is hardly any case for imposing a stock limit.

The National Agriculture Cooperative Marketing Federation of India (NAFED) has been procuring chana at MSP, and currently it may be holding around 24 lakh tonnes of chana.

The all-India average retail price of chana in the last one year (August 2022 to July 2023) and last five years (August 2018 to July 2023) was Rs. 73.36 per kg and Rs 70.55 per kg respectively. The retail price in August 2023 was Rs 76.39 per kg (see graph below). Thus, chana prices were only 4 per cent higher than the last year’s average price and 8.2 per cent higher than the last five years’ average.

The now repealed Essential Commodities (Amendment) Act 2020 envisaged that no intervention under the Act would be made if the price rise in non-perishable items was less than 50 per cent. The level of price rise in chana is nowhere close to the 50 per cent mark. If the underlying logic behind the Act was correct, there is no case for any intervention. In fact, it will be a big disincentive to chana growers just at the time of sowing their rabi crop.

Vegetables:

Retail inflation in vegetables touched 37.34 per cent in July, driven by the high prices of tomatoes. The government initiated the import of tomatoes from Nepal but only that of a small quantity (670 tonnes). The all-India price has since fallen to Rs 51.83 per kg (as on September 4).

The wholesale prices of onions started rising at the Lasalgaon mandi of Maharashtra, days after the spike in the price of tomatoes. The wholesale prices of onion stood at Rs 19.04 per kg in August in Lasalgaon. 

The Union government has decided to impose a 40 per cent export duty on onions until December. When the farmers started agitating, the government announced that 2 lakh tonne onions would be procured at Rs 24.10 per kg.

It is not clear from NAFED’s website as to how much has it procured so far. In fact, the website gives figures of onion procurement way back in 2017-18! Media reports suggest that only a small quantity has been procured. The modal prices at Lasalgaon continue to be below Rs 2,410 per quintal. If the export duty was not imposed, the farmers may have realised a better price.

In this case also, the price rise in onions was nowhere close to the 100 per cent mark envisaged under the now repealed Essential Commodities (Amendment) Act, 2020.  The all-India monthly retail price of onions on August 18 was Rs 30.50 per kg, compared to last year’s average price of Rs 25.50 per kg (August 2022 to July 2023). The average retail price in the last five years was Rs 30.29 per kg (see graph below).

Edible oils:

Edible oils and fats have a weight of 3.56 per cent in Consumer Price Inflation (CPI). Due to low global prices, the inflation in July was (-)16.8 per cent. India may import record high quantity of about 16 million tonnes edible oils this year while the normal level of import has been about 14 million tonnes. This should keep the edible oil prices under check for a few months.

Rice:

Of all the kharif crops, rice requires the most water. During August, India received 36 per cent less rainfall than the LPA. Central India received 47 per cent less rainfall while south peninsula received 60 per cent less than the LPA. In the unirrigated area where paddy is the crop, this would have an adverse impact of yield. In irrigated areas, farmers would have spent more on diesel.

The assessment of a possible lower crop would have persuaded the government to impose restrictions on export of various varieties of rice. In July, rice inflation was touching about 13 per cent. Lower crop yield due to deficient rains may further put pressure on the prices.

Conclusion

Going forward, food inflation will depend a lot on the rabi crop output. If the rains in September are good and well distributed, the residual soil moisture will help the rabi crops in India’s unirrigated regions. This will help in containing food inflation.

If wheat inflation continues in double digits, New Delhi may reduce import duty from 40 per cent to zero which will enable the private sector to import. However, Russia’s embargo on export of Ukrainian wheat from Black Sea ports continues. One can only hope that Türkiye's Recep Tayyip Erdogan and the United Nations will be able to persuade Russia’s Vladimir Putin to lift the same.

(Siraj Hussain is former Union Agriculture Secretary, and Kriti Khurana is doctoral scholar of economics, BITS Pilani, Hyderabad.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH