Thursday, October 6, 2022

Food-inflation a result of short-sighted policies?


As per government estimates of production, availability does not appear to be an issue as production of major agricultural commodities has increased since last year.As per government estimates of production, availability does not appear to be an issue as production of major agricultural commodities has increased since last year.

By Shweta Saini, Sandip Das, Aishwarya Pothula & Vijay Bangari

Notwithstanding Covid-19 disruptions, India’s agricultural performance in FY21 has been impressive, in terms of overall production, procurement (largely, wheat and rice) and growth in exports of agricultural and allied commodities. Yet, CPI has been rising. About 30-40% of CPI inflation in the recent months is due to the pressures from the food and beverage category.

The consumer food price index (CFPI), a sub-index of CPI tracking retail price movements of 10 sub-categories of food/food-items, grew at 5.15% (y-o-y) and about 1% (m-on-m) in June 2021. The largest contribution to this came from “oil and fat” (58%), “fruits” (16%), “pulses” (11%), “meat and fish” (8%), and milk (6%).

Monsoonal rain, a key determinant of agricultural production, was in the ‘normal’ range, with a deficit of about 1% compared to benchmark Long Period Average (LPA) as on July 26 (IMD). As per government estimates of production, availability does not appear to be an issue as production of major agricultural commodities has increased since last year.

Overall, robust rains are likely to encourage higher acreage and, possibly, result in bumper production next season, thereby reducing the chances of further price rise. Pulses-CPI has been rising sharply over the past two years, despite higher production production as per government estimate. What explains this inflation? Two plausible reasons are: (i) lower production and (ii) higher stocks.

Market-players predict the actual production of pulses to be much lower than the official estimates. Thanks to the Essential Commodities Act (ECA) 2020, private traders, importers, millers and farmers had been holding back stocks to sell at remunerative prices.

To dampen the price pressure, GoI removed the import quota restrictions on moong, urad and tur, on May 15, while the duties on these remained unchanged. It signed MoUs with Malawi and Myanmar in June, for annual imports of 50,000 tonnes of tur, 2.5 lakh metric tonne of urad, and 1 lakh metric tonne of tur or pigeon pea, respectively. The government also extended its MoU with Mozambique for importing tur (2 lakh tonnes annually) by another five years.

It invoked the ECA and came up with several directives: (i) on June 18, the department of consumer affairs requested states to declare their private stock levels (with millers, traders, importers, and stockists of pulses) to assess real-time availability of pulses across the country; (ii) on July 2, it imposed stock-limits for all the pulse but moong, till October 31; and (iii) on July 17, relaxed stock-holding limits to a large extent. For wholesalers, stock-limit would be 500 tonne (not more than 200 tonne of one variety of pulse), while the retailers are allowed 5 tonne of pulses.

For millers, stock-limits are the last six months’ production or 50% of annual installed capacity, whichever is higher. For importers, the stocks-limit mentioned in the July 2 notification has been done away with in the subsequent directives on July 17. Imposing stock-limits will force players to slowly offload their stocks into the market, moderating price pressures. GoI has also directed NAFED to start selling chana from its stocks to provide immediate relief.

The sudden invocation of stock-limits goes against ECA 2020, which stipulated imposition of stock-limits only under war, famine or natural calamities of grave nature, or extraordinary price rise. However, none of these events were at play when the restrictions were imposed. In May, the retail price of pulses has evidenced a rise that is way below (~6% for tur, against average retail price from June 2020 to May 2021). The ECA provisions stipulated price-rise threshold of 50% or more over previous-12-months levels for non-perishables like pulses.

Ad-hoc restrictions create an environment of uncertainty that will dampen trade sentiments and harm farmers in the forthcoming kharif season, with traders, millers, etc, being extremely cautious about buying harvest, in anticipation of the stock-limits being extended beyond October 31. The need, therefore, are far-sighted, comprehensive, dynamic yet stable policies.

Excerpts of an article published recently in APSI’s first quarterly publication, Agri-Food Trends and Analytics Bulletin. Authors are with ICRIER’s Agriculture Policy, Sustainability and Innovation (APSI) team

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