Opinion Ashok Gulati, Manish Kumar Prasad write: How not to tame inflation

Export bans, stocking limits can be counterproductive. India needs to use import policy liberally

consumer price index, CPI inflation, Inflation, high inflation, price inflation, food inflation, Indian express, Opinion, Editorial, Current Affairs

Our research shows that while tomato prices may come down in August-September, onion prices are likely to rise. There is no short-term solution, but in the medium term, at least 10 to 15 per cent of these items need to be processed to stabilise their prices.

Ashok Gulati

Manish Kumar Prasad

July 24, 2023 09:41 AM IST First published on: Jul 24, 2023 at 07:16 AM IST

The June Consumer Price Index (CPI) inflation figure of 4.8 per cent is discomforting for the RBI as well as the government. Further, the erratic monsoon has raised the risk of inflation. The government has imposed a ban on exports of white rice with the hope of taming cereal inflation. But will the move succeed? Our research says “no”. For proof, take the case of wheat. India imposed a ban on wheat exports in May 2022, and in June this year, it further tightened the grip on markets by imposing stocking limits on traders and processors. Yet, inflation in wheat has been in double digits. The reason: Policymakers are using instruments of the 1960s. Such bans on exports and strangulation of domestic markets will not be appreciated at all by G20 countries. The rice export ban will hurt the African countries most as rice prices are likely to go up internationally. India is the largest exporter of rice, accounting for almost 40 per cent of the global rice trade.

Domestically, it reflects a knee-jerk reaction and a strong pro-consumer bias, which is also anti-farmer. Such export bans on rice and wheat, and stocking limits on wheat also make a mockery of the agri-marketing reforms that the now-withdrawn farm laws were trying to achieve. There is no doubt that cereals and products inflation is high at 12.71 per cent. It contributes about 22.8 per cent to CPI inflation, as it has a high weight of 9.7 per cent in the food group in the CPI basket. The inflation rate for wheat stands at 12.37 per cent despite the recent ban on exports and the stocking limits on traders and processors. Furthermore, rice inflation stands at 11.78 per cent, and the FCI’s open market operations have elicited a lukewarm response.

The government is already giving free rice or wheat (5kg/person/month) to more than 800 million people under its PM Garib Kalyan Yojana. One wonders why it has been taken extreme steps such as banning exports or putting stocking limits. These measures betray a sense of panic and indicate the government’s lack of understanding on how to tame inflation in a market economy. In the case of rice, the export ban is puzzling as the government has stocks of more than 40 million tonnes (MT) — almost three times the buffer stock norms of 13.5 MT as on July 1.

Also read | Understanding PM Garib Kalyan relief package: its components, and some perspective on implementation

What could be a better way to tame wheat and rice (non-PDS) inflation? Reduce the import duty on wheat from 40 per cent to say 10 per cent. And for rice, unload excess stocks in the open market at lower prices than what the FCI has been doing recently. There is also a need to revise the weight of food and beverages in the CPI basket — this is outdated and based on the 2011 consumption survey. This weight currently is 45.9 per cent, and food alone is 39 per cent. Engel’s law clearly shows us that with rising per capita income, people will spend less on food. Our research suggests that the weight of food and beverages will be around 38 per cent in the CPI basket in 2023 and that of food alone about 33 per cent. With the old weights, we are overestimating CPI inflation, which needs urgent correction.

Another item in June inflation deserves attention. Tomato prices that are bothering the average household currently, show a negative inflation of (-) 34.7 per cent in June 2023. It is because last year in June 2022, tomatoes inflation was 158 per cent, and therefore when one compares, year-on-year (YoY) inflation, it turns out to be negative for tomatoes. But month-on-month (MoM) (June over May 2023) basis, inflation is 64.5 per cent for tomatoes. July may be even higher before it cools down in August-September when fresh arrivals start coming from Maharashtra. Right now, tomatoes have humbled the RBI, yet again. But one must ask for accountability from Operation Green, which was set up to stabilise value chains and prices of tomatoes, onions, and potatoes (TOP). Our research shows that while tomato prices may come down in August-September, onion prices are likely to rise. There is no short-term solution, but in the medium term, at least 10 to 15 per cent of these items need to be processed to stabilise their prices.

There is another important food item whose inflation needs to be checked — milk and milk products. The category recorded an inflation rate of 8.56 per cent in June 2023 and contributed 11.2 per cent to the overall CPI inflation. Interestingly, among the 299 commodities in the CPI basket, liquid milk has the highest contribution of 11 per cent to CPI inflation. Rising feed costs and lumpy skin disease have led to milk production stagnating (222 MT) in FY23 over (221 MT) in FY22. The policy solution again lies in reducing import duties on skimmed milk powder (SMP) from 60 per cent to 10 per cent and of butter from 40 per cent to 10 per cent.

Pulses and products inflation in June 2023 was also at double digits (10.53 per cent). And within this group, tur has to be watched. It has witnessed a high inflation rate of 27.5 per cent due to lower acreage and production compared to the previous year. Regions dependent on rainfall for pulses cultivation, such as Madhya Pradesh, Rajasthan, and Maharashtra, may see a reduced output due to anticipated adverse weather conditions caused by El Nino. Importing as much tur as possible from Mozambique, Malawi and Myanmar can help tame tur prices. Also, India needs to abolish the minimum import price for yellow peas, which currently stands at Rs 200/kg. Yellow pea is the cheapest pulse; it can act as an anchor and check the spurt in pulses prices.

To sum up, India can contain CPI inflation within 6 per cent, provided it uses import policy for food products liberally and well in time. Else, don’t be surprised if it breaches the 6 per cent barrier of RBI’s price band in September-October-November.

Gulati is Distinguished Professor and Prasad is Research Associate at ICRIER, (Views are personal)