The scourge is back. Or, so it seems. Consumer food price inflation, at 7.55 per cent year-on-year in May, has hit a 21-month-high. And what’s striking, and probably surprising, is how steep has been the climb – from an average of 2.7 per cent during July-September (when the monsoon rains had failed) to 5.2 per cent in March (when the drought was at its peak) and 7.5 per cent-plus now (when a good monsoon is supposedly round the corner).
Nor is the timing of the increase particularly helpful. The Reserve Bank of India, of late, has not been averse to cutting interest rates. The changed stance has been emboldened no less by the Centre’s “commendable commitment to fiscal consolidation” and its recent reform measures, including slashing of small savings rates. Even in his latest June 7 review, the central bank governor Raghuram Rajan made it clear that “the stance of monetary policy remains accommodative”.
But with food inflation rising again, the possibility of further rate cuts – since January 2015, the RBI’s key short-term lending or repo rate has been reduced from 8 per cent to 6.5 per cent – is effectively ruled out. On the contrary, there will be pressure to raise rates, as the overall CPI inflation of 5.76 per cent for May is well above the central bank’s target of 5 per cent by January 2017 and 4 per cent from the following fiscal. The fact that food items have a 45.86 per cent weight in the CPI – and there is little that monetary policy tools can do to control potato or dal prices – makes the RBI’s job all the more difficult.
It raises the question: Why are food prices rising now, especially when the drought is apparently behind us and the met department has forecast an “above normal” monsoon, with aggregate rainfall during June-September at 106 per cent of the long period average for the season? True, the rains have been deficit by about 21 per cent so far, but that picture is likely to change as we enter the peak kharif sowing period from June-end through July.
The most obvious explanation for the current spike in food inflation is that the effects of drought are felt most during the summer months. This is the period when the rabi crop – not a very good one this time – has already been marketed and we are still some time away from the next crop’s arrival from October. This, in a sense, is the proverbial darkest hour just before the dawn. With a good monsoon, our worries over food prices will mostly be washed away.
That hope may well hold for, say, pulses, which cost the BJP dear in the Bihar Assembly elections last October-November. Even the latest May CPI data shows retail inflation in pulses at 31.57 per cent. But one can expect farmers to significantly expand area under arhar/tur, urad and moong in this kharif season, mainly in response to high market prices. In fact, we saw them do this for rabi onions, so much so that a bumper harvest led to prices eventually crashing in March-April!
But there are some crops – especially sugar, wheat and potatoes – where we may not see prices really cooling even with a munificent monsoon.
India’s sugar production fell from 28.5 million tonnes (mt) in 2014-15 to 25.2 mt in 2015-16. The impact of last year’s drought and the low cane plantings in Maharashtra and Karnataka will, however, be seen more in the 2016-17 sugar season from October, with output expected to dip further to 22-23 mt. Imports can be a way out. But it is not an easy option to exercise, particularly with Assembly polls due in Uttar Pradesh early next year. Depressed sugar prices over the last three years have taken a heavy toll of the finances of both mills and cane farmers. Opening up to imports, just when prices are looking up, can hurt the BJP’s chances in UP where cane growers form a substantial vote bank.
Wheat and potatoes, on the other hand, are primarily rabi crops sown in October and harvested from March. Although the Centre has claimed wheat production for 2015-16 to be over 94 mt, flour millers and traders peg this at least 8-10 mt lower. Their estimates have some basis, given that wheat procurement by government agencies is down by 5 mt compared to last year and prices in major mandis are also higher by 14-15 per cent. Moreover, stocks with the Food Corporation of India on July 1 are projected at 28-29 mt, the lowest in eight years and just above the minimum buffer norm of 27.58 mt for this date.
Wheat imports now attract 25 per cent customs duty. This duty is technically applicable until June 30, when the marketing season gets over. It is not clear whether the Centre would allow the import duty to revert to nil after that. While the precarious domestic supply situation – notwithstanding the agriculture ministry’s higher production estimate – may make this necessary, there are again political compulsions (read Punjab elections next March) coming in the way of large-scale imports.
As far as potatoes go, the Centre’s own estimates point to a drop in production to 45.6 mt in 2015-16, from the previous year’s 48 mt. Low prices as well as unfavourable weather conditions led to farmers in states like Uttar Pradesh, West Bengal and Punjab planting less area in the recent rabi season. The effects of it are being felt now, with the tuber now retailing at twice the levels at this time last year.
The next few weeks, when the course of the monsoon would become clear, will decide where food inflation and interest rates are headed. And needless to add, the implications of it extend way beyond just these two variables.