Ashok Gulati writes: How to weather-proof food security

The food and beverages component in the Indian CPI has a weightage of 45.86 per cent, the highest amongst G20 countries. Managing this component to around 4 per cent is critical to taming overall inflation. Interestingly, this component of inflation can not be managed only through monetary policy, nor even by fiscal policy. The simple reason is that it is often triggered by external shocks, such as droughts and breakdown of supply chains — for instance, during the Covid pandemic and the Russia-Ukraine conflict.

The brewing El Nino is a looming danger and it’s feared that it could cause below normal rainfall, even a drought. Remember that all droughts since 1947 have been El Nino years, but all El Nino years are not necessarily drought years. There is often a tug of war between the El Nino and Indian Ocean Dipole, and we don’t know which way the clouds will swing. Although we have to wait for the Indian Meteorological Department’s (IMD) revised forecast about the monsoon slated for the end of this month, the unseasonal rains in April end and the first week of May do not auger well for agriculture. Old wisdom suggests that we should hope for the best but prepare for the worst. So, it may be worth thinking about how best to keep food inflation below 4 per cent in case the monsoon rainfall turns out to be below normal.

The biggest crop of the kharif season is rice. And rice inflation (non-PDS) for April was 11.4 per cent. Wheat inflation — that of the most important rabi crop — is still very high at 15.5 per cent. The overall cereal and products inflation is still at a very uncomfortable level, 13.7 per cent.

Three things need to be noted here. One, more than 800 million people are getting free rice and/or wheat (5kg/person/month) under the PM-Garib Kalyan Yojana. So, they are well protected from cereal inflation. Second, the rice stocks with the Food Corporation of India (FCI) are more than three times the buffer stock norms for rice. If the government wants to tame rice price inflation, it can unload 5 million tonnes (MT) of rice from the Central Pool in open market operations, and easily bring down the rice inflation to around 4 per cent. And the window to do that is from now to around September-October, just before the rice harvest season starts.

Third, the wheat procurement has been sufficiently good (touching 26MT) to meet the requirements of the public distribution system (PDS) — around 22 MT — and give some room for open market operations. The basic point I am making is that to tame cereal inflation, we have to use the buffer stocking policy more proactively. This would be much more effective than any monetary policy instrument. However, there is a concern about milk and milk products. Inflation in this category in April was at 8.85 per cent. But since it has the highest weight amongst 299 commodities that comprise the CPI basket, its contribution to CPI inflation in April was almost 12 per cent, the highest amongst all commodities.

Experts give two reasons for this inflation. One, the lumpy skin disease took its toll and as a result, the milk production growth rate collapsed to almost zero in FY23 from a normal growth rate of 5 to 6 per cent it achieves in a normal year. Second, the fodder price inflation has been very high, between 20 and 30 per cent, in recent months. Both these factors have been straining milk prices, which are not likely to come down this fiscal in the business-as-usual scenario.

The policy instrument to use is to lower import duties on fat, which are currently at 40 per cent and skimmed milk powder (SMP), which is at 60 per cent. Indian prices of SMP and fat (butter) are much higher than the global prices, and therefore, by reducing import duties to say 10 to 15 per cent, there would be some imports of fat and SMP. That could help in reining milk and milk product prices.

The bottom line is that we need to focus on cereal and milk inflation, both of which have high weights in CPI. The policy instruments to keep their inflation around 4 per cent are the buffer stocking policy (unloading excess stocks in open market operations) and import policy (reducing import duties). These policy actions have to be pre-emptive in nature and not reactive to the event.

Our research in this area shows that there is a lag of two to three months for these policy actions to show their results. As one can note that in case of unloading of about 3.4MT of wheat during January to March brought down the wholesale prices of wheat, which enabled procurement of 26MT plus. But the retail price inflation of wheat is sticky, and still in double digits. In case of milk, the policy makers are already late. But as the old proverb says, it is better to be late than never.

The writer is Distinguished Professor at ICRIER. Views are personal