Consumer food inflation hitting a 21-month-high of 7.55 per cent in May poses a major dilemma for the RBI, even with more than two months left for Raghuram Rajan to relinquish office as governor. With tomatoes and potatoes now retailing at twice their levels at this time last year, while ruling a third or more for sugar, arhar and urad dal, food prices are hogging the headlines again. The RBI, in recent months, has been adopting an accommodative monetary policy stance. If food prices stay elevated, the central bank would be under pressure to raise interest rates once again, though admittedly there is little this can do to control inflation in agricultural commodities that is largely supply rather than demand-driven. The government and the RBI have, in a sense, been lucky. For a country that has seen back-to-back droughts in the last two years, it is remarkable how food inflation was under reasonable control until recently. True, onion registered a spike last year and prices of pulses have remained high right since the destruction of the 2014-15 standing rabi crop by unseasonal rains. But on the whole, this is probably India’s first ever drought whose brunt has been borne by farmers, not consumers. The latter are feeling the heat only towards the drought’s end.
The current prices aren’t the real worry. With a good southwest monsoon, one can expect most vegetables — tomatoes and even pulses — to turn cheaper as the new crop arrives from September onwards. What matters more is how the monsoon itself pans out. While the Met department has forecast overall rainfall for the season (June-September) to be 6 per cent above its normal average, the monsoon has so far been 23 per cent deficient. The monsoon’s late onset and slow progress has also led to a lag in kharif sowings. But that should not be a major factor for concern now. A mild delay followed by good showers in July and August is, moreover, preferable to last year’s situation, where farmers were enthused to sow because of surplus June rains that gave way to progressively deficient precipitation in the subsequent months.
What is required today is sensible policy. High prices, in combination with a monsoon that should turn out normal, would push farmers to expand acreages under pulses, maize, tomatoes and other crops in short supply. Recent government actions — from suspending futures trading to directing enforcement agencies to crack down on so-called hoarders of pulses — will only suppress the desired supply-side signals. This is the right time to allow the market and farmers to do their job. The Centre can help in augmenting supplies by permitting duty-free imports of wheat and raw sugar. These measures should obviate the need for any fresh monetary tightening by the RBI.