Will unrelenting food inflation sour the festive season ahead?

The Government is already using the buffer stock of chana to cool the market

Although government data on inflation measured by the monthly Consumer Food Price Index (CFPI) at an all-India level in June 2023, shows a mere 4.49 percent inflation, households reel from a price rise in wheat, rice, wheat flour, pulses (except chana), milk, spices and almost all vegetables.

This time, even the middle classes are feeling the heat of food inflation. Tomatoes, a staple in most kitchens when prices are reasonable, have also become prohibitively expensive at more than Rs 100 per kg. The poor know how to substitute more expensive food items with less expensive ones, but middle-class households appear to be still picking up tomatoes.

This is not the first time that food inflation is pinching the pockets. In June last year, food inflation was even higher at 7.56 percent. The staple food of poorer sections is wheat and rice.

Due to lower procurement of wheat last year, the Union Government has been providing a larger quantity of rice through fair-price shops even in predominantly wheat-consuming states. From the onset of Covid-19 in April 2020 to December 2022, the government provided 10 kg wheat/rice per person per month, and this reduced the need for ration card holders to purchase the same from the open market. Now that the additional quantity is not being issued, the households would have to buy it at market prices.

Cereals inflation in June 2023  too saw an inflation of 12.71 percent. in June. For wheat and wheat flour, this is not the usual time for higher prices as arrivals in the market in the April to June period keep the market well supplied. For the first time this year, the Union even the government has been forced to sell wheat under the Open Market Sale Scheme (OMSS) so that price rises can be checked.

While the price rise in rice can be attributed to the fear of El-Nino and its impact on production of rice, the price rise in wheat could only be due to disagreement about the production estimates of the government. While the Government estimates say that production was 112.7 million tonnes, trade estimates are in the range of 105 million tonnes. The price rise in the last three months reflects this difference in production estimate.

As the festival season approaches and the full impact of unusually high rains in the north-western states and lower-than-normal rains in the eastern and southern states is factored in by the market, there is a possibility that this trend of rising prices may continue. India supplies about 40 percent of global rice so there is no possibility of rice import. The monsoon too has continued to be erratic. All of this, together forced the Government’s hand, which passed an order on July 20, banning the export of non-basmati rice. This is bad news for the global market.

In the case of wheat, there are more options with the government and the import duty may be reduced from 40 percent to 10 percent or even zero. This may enable wheat import in the southern ports (except Karnataka, where the connectivity between Mangalore and other districts is not too good).

The wholesale price-based inflation is also not bringing comfort to policy makers as it will reflect in higher consumer prices in coming months. In June 2023, tur and urad prices were 30 percent and 12 percent higher respectively. Inflation in moong was 11.9 percent. The sown area under pulses has been lagging due to poor rainfall in rain-fed areas of Maharashtra and Karnataka. As of July 13, the sown area under tur was 13.3 percent less than last year. It was expected that the area under kharif pulses will go up on the expectation of lower rainfall but it has not happened. If monsoon activity resumes in regions growing pulses, the sown area will increase but productivity will be lower if rains are highly deficient.

The import of pulses has been managed well by the Modi Government and several long-term contracts for import have been signed with Myanmar and Malawi. It will be up to private trade to bring in pulses in time for the festival season. Here, the fear of the Essential Commodities Act may be a dampener rather than a facilitator.

The Government is already using the buffer stock of chana to cool the market. While the poor will shift from tur to chana, the middle classes will have to continue to buy tur at higher prices.

In the case of vegetables, the government cannot do much as it is not possible to procure most seasonal vegetables due to their perishability and absence of mechanisms and infrastructure to distribute the same. Only in Delhi, the government can use Mother Dairy booths and some consumer stores (of National Agricultural Cooperative Marketing Federation of India (NAFED) and the National Cooperative Consumers Federation) to symbolically sell a small quantity. We can expect good publicity for such initiatives.

However, there is a silver lining in the case of edible oils where global prices are low and private trade is importing substantially in preparation for the festival season. Similarly, sugar may not show high inflation as the country will remain well supplied even if production is similar to last year’s 32.8 million tonnes. It is possible that the export of sugar will not be permitted due to the 2024 Parliamentary elections.

All in all, the policymakers sitting in Krishi Bhawan will have a busy season ahead.