Farm outlook brightens, food prices to dip: PM

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India's farm output in 2009/10 will be higher than initial estimates, raising prospects that food inflation, which has soared in recent months, will soon be controlled, Prime Minister Manmohan Singh said on Saturday.

Even as prices are expected to stabilise in the near-term, an official panel would be constituted to recommend long-term measures for increasing agricultural production and for reducing the gap between farm gate and retail prices, a government statement said later in the day.

India's food price index rose an annual 17.56% in late January, just ahead of the Reserve Bank of India (RBI) setting the stage for rate hikes by raising banks' cash reserve requirements by more than markets had been expecting.

As persistently high food prices spill over into broader inflation and stoke public anger, government officials and the RBI are walking a fine line between controlling prices and nurturing the recovering economy.

Singh told a conference of chief ministers of states that provincial governments should improve data collection as gloomy forecasts after 2010 saw the worst monsoon in 37 years raise inflationary expectations.

"This year the initial data made available by states showed much less production than what the states' latest estimates show," Singh said.

The government is expected to issue the latest crop estimates next week.

In November, the government said the country's summer-sown rice output would fall 18%, while cane production would drop 9% -- a forecast that raised the prospect of higher food prices and large imports of sugar and rice.

"As expectations play a very big role in determining food prices, the initial low expectation, therefore, also contributed to the price increase," the prime minister said.

Prospects of large imports by India, the world's top sugar consumer, catapulted New York raw sugar futures to a 29-year high this week, although on Friday, fears over the global economy helped futures fall to a six-week low.

Singh said the prospects for winter-sown crops were also bright, further improving the supply situation.

"Post-monsoon rains have been good. All this augurs well for our ability to stabilise food prices at a reasonable level," he said.

The Prime Minister said India had adequate stocks of rice and wheat to maintain food security.

'WORST IS OVER'

Rising food prices have given opposition parties ammunition against the federal coalition, which was voted back to power last year on the back of strong support in rural areas, where farmers have gained from higher grain prices.

"We are all very concerned about the distress that the sharp rise in food prices has caused to the common man," Singh said.

"I believe that the worst is over as far as food inflation is concerned.

Citing the wide difference between retail and farm gate prices, Singh said the government needed to take a firm view on opening up retail trade to ensure greater competition.

Singh also said India was likely to grow at 7.5% for the fiscal year ending March, at a faster clip than the 6.7% economic expansion recorded for the previous year.

For the full text of Singh's speech, see http://link.reuters.com/cup97h

On Friday, Singh was quoted by a spokesman of the Congress Party as saying the country would try to control rising prices by increasing production.

The government has also taken a series of measures to control sugar prices.