Let me start by complimenting the Reserve Bank of India (RBI) team, especially its Monetary Policy Committee (MPC), for ‘the pause’ in raising repo rates in its last meeting. Governor Shaktikanta Das framed it very appropriately when he said that it is a pause, not a pivot, and he is open to any further increases in repo rates if inflation remains defiant. Although this pause was against the majority view in the market, it has served two important purposes: One, it has clearly shown that the RBI is not blindly following the US Fed in raising interest rates to tame inflation, and two, it reflects the RBI’s confidence in containing inflation below 6% while keeping overall GDP growth well above 6%. I hope this confidence turns into reality—which it can if India follows the right policy mix. What could that policy mix be?
Before we get into the policy mix, let us understand the nature of CPI inflation, and how it is likely to behave if India is hit by El Nino, and if monsoon remains at 96% or 94% of the Long Period Average (LPA) as predicted by IMD and Skymet recently.
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The CPI data of March 2023 reveals that inflation has dropped to 5.66% (y-o-y), which is below the upper limit of the RBI’s tolerance band of 4+/- 2%. Interestingly, this drop in overall inflation has been brought about, to a great degree, by the cooling of food inflation (CFPI), which is at 4.79%. Vegetable price inflation is in the negative zone, at -8.51%, followed by oils and fats (-7.86%).
This has caused some stress to onion farmers where prices dropped by more than 30% (y-o-y); potato prices dropped by 20%, and mustard prices are ruling well below the minimum support price (MSP). Maharashtra has extended some support to onion farmers. But much more is needed to safeguard farmers’ interests. Yet, for the RBI, it has turned out to be timely in containing inflationary expectations, which is the need of the hour.
However, even in food, inflationary concerns remain high in case of cereals, milk and milk products, and spices, where inflation is still roaring at 15.3%, 9.3%, and 18.2%, respectively. Milk and milk products has the highest weight in CPI and therefore contributes the maximum to CPI inflation. It may be worth noting that the milk production in the country, which normally has been growing at 5- 6% per annually over the last few years, suddenly came to a near halt in FY23 with overall production at 222 million tonnes (mt) against 221mt achieved in FY22. The reason cited is the lumpy skin disease that impacted quite a large number of animals.
Although the recent reports suggest that growth in milk production is gaining momentum, it will still take time to cool milk prices. Amul has raised its prices three times and Mother Dairy even more in a single year.
In such a situation, the only logical option in the short term to contain milk prices seems to be reducing import duties on skimmed milk powder (SMP) and butter to about 15%. In the medium to long run, the Centre has to have a plan to augment good-quality fodder supplies and raise productivity of milch animals.
But what about cereals? Wheat inflation (non-PDS) is still roaring at about 20%, though it is likely to come down in the next two months as harvesting and procurement picks up in Punjab-Haryana belt. The unseasonal rains in March played spoilsport, and created uncertainty about the wheat output. While the government is yet to finalise its numbers about wheat output loss, private trade has already started discounting the production target of 112 mt by 4-5 mt.
In this situation, the Centre can lower import duties on wheat and let traders import if they find it cheaper to import than procure Indian wheat. The bottomline is that there should be ample supplies in the country to avoid any distress situation quite like what is playing out in some neighbouring countries.
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But now the prospect of El Nino hitting India sometime towards the later half of the monsoon season has created a new uncertainty about kharif crops. From rice to maize to soyabean to groundnut, and even pulses, could be under stress. However, rice stocks in the country are more than three times the buffer stock norms. So, there is no need to panic on that front.
Edible oil prices are already collapsing due to cheaper global prices of palm and other oils. So, there is no need to worry on that account too. But pulses, especially tur, urad, etc, can spoil the show.
Import of 2-3 million tonnes of kharif pulses by NAFED or private trade should not be ruled out.
The import duties are already low, and thus no further policy action is needed. And who knows, if El Nino has to fight the Indian Ocean Dipole, and the monsoon could be normal.
To sum-up, food inflation can be contained even below 5% in FY24 provided India uses trade policy wisely and well in time. Knee-jerk reaction when prices flare up does more harm than good.
A good idea is to peep into the near future by developing commodity-futures markets.
Unfortunately, several agri-commodities have been suspended from futures platform due to sheer ignorance on how futures markets function. In the absence of any future signals, therefore, the reaction of our policymakers is often abrupt, crude, and irrational.
India needs to invest in building trust in futures markets. Improving their efficiency with information symmetry as also bringing transparency through better technologies and regulatory institutions needs to be a priority. The RBI and the Centre jointly need to enhance their tool kit to contain inflation below 5% and keep GDP growth at 6.5%. If they can achieve this in FY24, despite global headwinds and uncertain monsoon, it would be a wish come true.
The writer is Distinguished professor, ICRIER
Views are personal