SUPPLY DISRUPTION WIDENS GAP BETWEEN WHOLESALE & RETAIL FOOD INFLATION

The disruption in supply chain by the mandis to consumers during the coronavirus (Covid-19) lockdown has made food items dearer for end users.

This has, however, not translated into big gains for the growers. Though, at the individual item level there could be synergy between wholesale and retail inflation, but the broad index showed a divergence.

Wholesale-price index (Wpi)-based food inflation rate in April 2020 was 2.55 per cent, which slipped further to 1.13 per cent in May 2020. However, the consumer price index (CPI) for food items during the same period rose from 9.13 per cent to 9.28 per cent.

The gap between the two widened from 6.58 percentage points in April to 8.15 percentage points in May 2020.

Both the CPI and WPI food inflation rates had been falling from December 2019 till March 2020.

Since then, while the WPI food inflation rate continued to fall, the CPIfood inflation rose. This signalled a breakdown in supply chain from the mandis to the final household.

During the two months of lockdown, though things had started coming to the mandis after an initial few days of disruption due to easing of restrictions, their onward movement to the consumers’ plate remained broken for a long time. This is because small tempo operators, handcart sellers and retailers faced problems in moving the goods. Many of the neighbourhood vegetable sellers also left for villages as economic activities slowed down.

“WPI growth is usually around 1.5-3 per cent in the harvest months starting April. And this year, we have had a good harvest, so it is hovering around that range. Now, with a bumper harvest, if there is a problem in getting it to the consumption centres, which is mainly the cities and because of which the supply is relatively less than what it used to be, it will push up the retail inflation rate,” said Pronab Sen, programme director for the International Growth Centre (Igc)-india Programme and former chief statistician.

“To me, it is essentially a supply chain issue,” Sen said, discounting the possibility of intermediaries making a large profit beyond the wholesale market.

“You see, profiteering happens when it is established that the person has made higher margin than justified. Unless that is well proven, it is difficult to say whether middlemen milked the lockdown situation to their advantage,” Sen said.

The country’s foodgrains, fruits, and vegetables production has shown a record increase this year, but it may not have translated into big gains for the farmers except for crops in which there is direct buying by the government.

This was largely because of the breakdown in the farm to fork logistics, which in normal times is also highly fragmented and dominated by small players. The country produced a record 291.95 million tonnes of foodgrains in 2019-20, which is 2.36 per cent more than 2018-19. Horticulture (fruits and vegetables) output is projected at an alltime high of 320.48 million tonnes, which is 3.13 per cent more than last year’s figure.

“Another thing which also needs to be taken into consideration here is wastage of food. If the bumper harvest doesn’t reach the consumers, it pushes up prices. It must have got wasted or farmers may have sold it at throwaway prices outside the mandis. This has not been captured by the WPI numbers,” Sen said.

DK Joshi, chief economist at CRISIL, said one could say farmers were not getting the right price during the lockdown that is reflected in WPI numbers but consumers ended paying more. That is the story in India but got aggravated due to the lockdown, as till March, both WPI and Cpi-food were falling.

Some parts of this could be attributed to profiteering but it is a genuine supply disruption. Agriculture reacts quickly to supply disruption in the form of inflation, Joshi said. “To me, the end result of this was that farmers didn’t get the right price for their produce despite producing a bumper crop,” said Madan Sabnavis, chief economist at CARE Ratings.