Food inflation may remain sticky at 7-9% on higher MSP, poll promise rollouts, says economist Ashok Gulati

Ashok Gulati, Distinguished Professor at ICRIER

Even as overall retail inflation eased in the past couple of months, food prices remained comparatively elevated and rose to 8.70 percent last month from 6.61 percent in October as per the Consumer Price Index (CPI). And, according to agricultural economist Ashok Gulati, it may remain elevated in the range of 7 to 9 percent going ahead.

Commenting on the trajectory of inflation in India, particularly food prices, Gulati tells Moneycontrol in an interview, that “given that the Minimum Support Price (MSP) of paddy and wheat has been increased by more than 7 percent for 2024-25, and the Bharatiya Janata Party (BJP) has announced bonuses on rice and wheat for Chhattisgarh, Madhya Pradesh, and Rajasthan, there is a strong possibility that food inflation will remain sticky.”

However, Gulati, currently a Professor at the Indian Council for Research on International Economic Relations (ICRIER), added that India’s inflation trajectory primarily hinges on how El Nino conditions play out as well as on the extent of heat waves in February-March.

The Cabinet on October 18 raised the MSP for six rabi or winter crops, including wheat for the marketing season 2024-25 in the range of 2-7 percent. Apart from this, the newly-elected BJP governments in Rajasthan and Madhya Pradesh are expected to soon roll out their poll promise of adding a bonus to the existing MSP for wheat, and on paddy for the state of Chhattisgarh.

Commenting on the latest retail inflation data for November, Gulati said that within vegetables, items such as “garlic, ginger, onion, are on fire. Pulses at 20 percent plus with tur at more than 40 percent; and spices too at above 20 percent, particularly jeera are on fire.”

As per the latest CPI inflation data for November, among food items, the vegetables index rose 5.0 percent MoM primarily due to a whopping 48 percent sequential increase in onion prices and 41 percent rise in prices of tomato. The overall headline figure came in at 5.55 percent last month, higher than the 4.87 percent print for October.

Gulati said that in the medium to long run, the government needs to work towards raising productivity by investing in research and development in agriculture and facilitate better farm practices, in a bid to tame food inflation.

“Revdi culture, especially during election time, is not good for the country. Freebies can't make you a rich nation. It is investment and innovation that is needed,” he added.

Export Curbs
Gulati termed measures such as placing export bans on key staples to keep a lid on prices, outdated.

“Export bans, be it on onion, sugar, or wheat and rice, are no solution to tame food inflation. They inflict a very heavy cost on farmers and reduce years of hard work of exporters in developing export markets to zero. This export ban policy or putting stocking limits in traders is an outdated policy mix of the 1960s,” he added.

The Central Government has taken a slew of measures over the last couple of years to bring down retail inflation, with the latest being a ban on exports of onions till March 2024 to increase domestic availability and to keep prices in check. Apart from this, it has prohibited export of wheat, rice and other commodities as well as facilitated the sale of subsidised tomatoes to ease price pressures.

Gulati, however, says that the government needs to avoid knee-jerk reactions and deploy a “new policy mix” to balance the interests of consumers and farmers.

“We have $600 billion in reserves, which should be used to import 5mt of wheat, 1-2mt of pulses, especially tur, and develop a medium-term strategy of promoting dehydrated onions and tomato puree to stabilise prices of onions and tomatoes,” the ICRIER Professor said.

Finance Minister Nirmala Sitharaman on December 12 said that Indian consumers have to be prioritised when there are crop shortages, commenting on the supply-side steps taken by the Centre, including export bans on key commodities.

While, the Centre has been consistently intervening to cool retail prices of key staples such as onions, to insulate consumers, farmers have been less than happy over steps like export curbs or bans as it disallows them from taking advantage of higher prices.