Food prices call for vigilance
Global food price surge feeding into domestic prices will make policymaking difficult
The past few weeks have seen a growing uncertainty about the amount of wheat the government will be able to procure this year. In regions where procurement has traditionally been high, market prices have surged beyond Minimum Support Price (MSP) levels, encouraging farmers to sell to private traders rather than the government. Given the tightness in the international wheat market, private traders are building inventories in anticipation of future gains. Analysts posit that government procurement will fall significantly short of last year’s levels. Data from the Food Corporation of India (FCI) shows that the government has procured around 11 million tonnes of wheat in this rabi marketing season up to April 20. This figure was 16 million tonnes as on April 19 last year.
This year’s procurement (perhaps even production) ending up lower than last year’s comes even as the government is planning to export up to 10-15 million tonnes of wheat and private traders are stocking up — this is the perfect constellation for a sharp rise in prices. Wheat is not the only worry. Indonesia, the world’s largest exporter of palm oil, has banned edible oil exports on account of domestic shortages. This is bad news for India, the world’s biggest edible oil importer. Edible oil inflation has already been very high in the past year.
These developments come at a time when the inflationary situation is already expected to be volatile. In its April meeting, the Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) projected that retail inflation will stay above the 6% mark in the quarter ending June 30. In an interview with Business Standard, MPC member Jayanth Varma said that inflation staying above the 6% level for three consecutive quarters – this will be a violation of RBI’s mandate under the inflation-targeting framework – is a possibility. The inflation-targeting framework seeks to control inflation by giving a demand shock (by raising interest rates) when there is a surge in prices. But demand shocks do not apply to food and are unlikely to help bring down food prices. There is little MPC can do on the food inflation front. This calls for more synergised intervention from the Union and state governments. That may include a review of wheat exports and, in the case of edible oils, an aggressive plan for procurement in the short-term and self-sufficiency in the long.