After two years of stubbornly high food inflation, India may finally see some stability in prices of most farm commodities should it manage supplies properly as production is likely to be very comfortable in the crop year through June. This means food prices that have eased considerably since December are unlikely to flare up in 2012-13, much to the relief of policymakers as they draw up the Budget.
Of the nine key farm commodities, the country is expecting surplus stocks in seven items on the back of a bumper harvest. An FE analysis shows supplies of rice, wheat, sugar, cereals, cotton, onions and potatoes will exceed demand, while the output of oilseeds and pulses will trail consumption in 2011-12.
Rice, wheat and coarse cereals account for more than 90% of the total grain consumption of 234 million tonnes, implying a higher output of these items will have a salutary effect on food inflation. Of course, food inflation ? which remained in double digits for most part of the last two years ? was largely attributable to fruits, vegetables and protein-rich items, but grains, with a significant weight in the relevant index, also contributed to high inflation in 2009 and 2010.
India, the world’s second-biggest grain grower, expects to consume 95 million tonnes of rice and 80 million tonnes of wheat in 2011-12, while its output of both the grains is estimated higher at 102.75 million tonnes and 88.31 million tonnes, respectively. Similarly, the country would consume around 40 million tonnes of cereals, 21.5 million tonnes of sugar, 26 million bales of cotton, compared with the expected higher production of 42.08 million tonnes, 24.7 million tonnes and 34.5 million bales, respectively, according to official estimates.
Among horticulture crops ? another driver of food inflation in the past two years ? onion and potato output is expected at 15 million tonnes and around 40 million tonnes, compared with the requirement of 13 million tonnes and 35 million tonnes, respectively.
However, shortages will be seen in oilseeds and pulses. While the country is forced to import around half its edible oil requirement, it purchases less than one-fifth of its annual pulse requirement to tide over a domestic crunch. The only relief is that edible oil is available in huge volumes in Indonesia and Malaysia, and supply shouldn’t be a problem although currency fluctuation will play a key role in the costs.
Food inflation in India had remained for long at an uncomfortably elevated level since a drought clipped the country’s summer harvest in 2009, before easing significantly recently on a high base and improving supplies of vegetables. Opposition parties had often stalled Parliament proceedings last year and in 2010 for what they alleged the government’s inability to curb the price rise in food items as they hurt the common man most.
The country’s annual consumer price-based food inflation rose 4.11% on debut in January from a year before, while the wholesale food prices gained 0.52% during the period, reflecting a moderation in price pressures in the economy.
Finance minister Pranab Mukherjee has said inflation will continue to decline and stand closer to 6% by end-March, although the softening of manufactured goods prices may be more gradual despite the rapid decline in non-food primary inflation.
“We expect to even cross the record foodgrain output estimate of 250.42 million tonnes for this year going forward, mainly due to higher-than-expected output of wheat and rice. A good harvest will give much-needed comfort to the food department as the country plans to implement the food security law. Moreover, food inflation is expected to be at a reasonable level,” agriculture secretary PK Basu told FE. The agriculture ministry is expected to announce its third advance estimate of crop output in around a month.
The Prime Minister’s Economic Advisory Council said this week that the production of winter-sown grains may exceed the forecast of 123.6 million tonnes, while oilseeds as well as pulses output “may turn out to be equal or perhaps greater than last year’s production”, viewing the last estimate to be conservative. According to the second advance estimate of the agriculture ministry, the production of pulses and oilseeds may touch 17.3 million tonnes and 30.5 million tonnes, respectively, in 2011-12.
Government officials said the country will also produce adequate fruits and vegetables to meet demand in 2011-12, but apprehended that infrastructural bottlenecks could play spoilsport. As much as 40% of the country’s fruits and vegetable rot every year due to the lack of adequate cold storages.
“It’s basically a problem of plenty this year. We produce key crops adequately, but the supply mechanism and infrastructure haven’t been able to match up. Only when we are able to tackle both supply- and demand-side pressure will inflation automatically come down,” said a government official, who didn’t want to be named.
The country’s food supply management system hasn’t been good as some states haven’t amended the APMC Act to strengthen marketing and boost participation of farmers, contributing negatively to food inflation. Prime Minister Manmohan Singh has also sought renewed focus on farm research and reforms in agricultural marketing.
Food minister KV Thomas has set up a committee to gauge the impact of food wastage in the country, from the field to the table, and suggest ways to curb them. The panel’s report is awaited. The food ministry is also planning to add around 15 million tonnes of storage capacity over the next few months. However, analysts said bridging the infrastructural bottlenecks is no easy task and can’t be improved overnight.
The analysts added that food inflation will soar again if prices of protein-based items such as milk, eggs, fish and meat surge due to any supply crunch as a resurgent and health-conscious middle class opts for higher-vitamin food. Milk demand of 120 million tonnes is expected to exceed production by around 5 million tonnes in 2011-12, potentially stoking a price rise if the government doesn’t get its act together, they added. These apart, the minimum support prices of crops will also play a key role in sparking inflation, they said.
However, the government official said, “Our assessment is that the basic fundamental of demand-supply gap affects food inflation more than anything else. Even if the government raises crop prices exorbitantly, it doesn’t always mean the open market prices will go up that much. Despite raising the MSP (minimum support price) of paddy and wheat for 2011-12, grain inflation has been significantly lower than other items where there is no MSP.”