RBI foresees higher food prices despite surplus crop

ONE HAND, the RBI said the short-term outlook for food inflation has turned uncertain. On the other hand, the RBI claims that the total production of foodgrains has reached a record 296.65 million tonnes in 2019-20

The country’s headline inflation is expected to firm up further in the coming months largely due to disruptions in food and manufactured items’ supply chains, the RBI said in its annual report for 2019-20.

In the same report, the central bank also claims that surplus foodgrain management has become a major challenge for the country.

One hand, the RBI said headline inflation picked up strongly during the closing months of 2019-20 and the short-term outlook for food inflation has turned uncertain. On the other hand, the RBI claims that the total production of foodgrains has reached a record 296.65 million tonnes in 2019-20, while total horticulture production — accounting for about 40 per cent of gross value added (GVA) in the farm sector — also reached an all-time high of 320.48 million tonnes.

India is now among the leading producers of milk, cereals, pulses, vegetables, fruits, cotton, sugarcane, fish, poultry and livestock in the world.

But the RBI claims that disruptions in the supply chains of food and manufactured items could amplify sectoral price pressures, thus posing an upside risk to headline inflation.

The RBI also stressed on agricultural exports that expose the Indian farmer to international terms of trade and technology; and public and private capital formation in the farm sector.

Experience shows that in periods when the terms of trade remained favourable to agriculture, annual average growth in agricultural GVA exceeded 3 per cent. Otherwise, the main instrument of incentive has been minimum support prices, but the experience has been that price incentives have been costly, inefficient and even distortive, the RBI report added.