This monsoon has been ringing alarm bells. It has rarely been as disruptive as in the recent past. While weather forecasters had warned about the possibilities of a El Nino-led rainfall deficiency, overall precipitation has exceeded normal so far. What is troubling is the extreme spatial and temporal distribution, raising apprehensions of a poor kharif crop output. Markets, as always, are reacting to such expectations—and prices of key kharif crops like rice, pulses, and vegetables have been rising.
The monsoon-driven, seasonal price increases are generally expected to stabilise in the months ahead. Policy makers, both the central government and the RBI, are expected to look through these temporary spikes, especially if foodgrain stocks with Food Corporation of India (FCI) are comfortable. Consider rice—at 25.3 million tonnes on July 1, 2023, the FCI stock is about double the minimum norm of 13.5 million tonnes, though slightly below the previous four-year average of 27.2 million tonnes. This should have normally assured the government to remain calm. But it’s reaction and interventions have taken many by surprise.
To begin with, rice sales to the states under open market scheme (OMS) in June 2023 were discontinued and followed up by open market sales to private traders to boost market supply. However, the government’s recent decision to ban non-basmati white rice exports and sudden stop of rice supply for ethanol production has rung alarm bells in international markets where India is a key exporter, raising doubts that domestic supply could be much worse than initially assessed.
The common explanation that these ex-ante measures are aimed to keep a lid on domestic prices ahead of forthcoming state and national elections is not convincing. Rice prices were progressively rising over the past several months, much before the current disruptive monsoon phase, and the needle of suspicion has turned ex post. The concern is that rice stocks with private traders may already have been running low, and uncertainties about future harvest (kharif 2023) is making it worse. Such assessment seemed incongruous though, given the government’s estimate of record rice production of 135.5 million tonnes in 2022-23, further buttressed by robust rice procurement of 56.9 million tonnes by the FCI in the kharif marketing season, 2022-23.
There is not much credible information about the stock position with private traders. In most cases, this is a balancing assessment derived from an equation [current stocks = carryover stocks by private traders from previous year + crop estimates for current year – stocks retained by farmers for seedling and self-consumption – procurement by government agencies like FCI]. If indeed there was a record rice crop harvest in 2022-23, then current stocks with private agents should have sufficed for domestic as well as export demand. It is no surprise in the context then that some newspaper editorials have raised questions about rather optimistic production estimate for 2022-23 agriculture crops. We’ll have to wait to see if the government revises these to reflect market realities.
A more intriguing question however is why the private traders are not buying rice auctioned by FCI if their stocks are indeed low? Press reports suggest traders are apprehensive about measures like stock limits and raids by government agencies, a part of the tool-kit that analysts describe as “deft supply management” by government.
Then, we also do not know why the stock of non-basmati white rice is low. Another layer of information may need peeling to know if overestimated rice output, if at all, is rooted in the non-basmati white rice growing areas. Such knowledge is not in the public domain, however. What we do know though is that six rice-growing meteorological subdivisions in the Gangetic plains (West and East Uttar Pradesh, Bihar, Jharkhand, and Gangetic West Bengal) received deficient rainfall in 2022. Unfortunately, the same region is again seeing extreme rainfall deficiency this monsoon too. Two consecutive years of deficient rain are a rare occurrence for such a large rice-growing region even as the country sees normal precipitation overall. Is this an early hint at the potential impact from climate change?
When we turn to wheat, the other major cereal whose prices have also been rising, and its harvest in last two consecutive years, the climate impact becomes even more apparent. A sudden, extreme heat in March 2022, and unseasonal rainfall in March 2023 damaged the wheat crop, leading to poor harvests, low government procurement, and relatively lower stocks with FCI. Not surprisingly, for any assessment on wheat stocks with private traders, we confront the same issue of optimistic crop estimates, completely divorced from market signals, and again flagged by some newspaper editorials.
Even though there are no scientific bases to claim the impact of climate change on crop output, especially cereals such as rice and wheat, it would be difficult to ignore the unexpected weather outcomes in the past four successive cropping seasons and their consequences for rice and wheat harvests. Those could have also impacted the prices of vegetables, spices, milk, and milk products.
Taking note of the disruptive monsoon impact on the succeeding kharif crops, many analysts have revised up their FY24 inflation forecasts. However, they have maintained the expectations of food prices to mean revert in the medium-term. Two critical inputs that could hinder the government’s supply management efforts seem ignored here: One, no recourse to cereal imports, given tight international supply conditions; and two, accessible tools like stock limits could be counterproductive in tight supply conditions.
The significant concern would be if food prices were undergoing a structural break, unlikely to mean revert, and thus exerting pressure on wage formation in the medium-term. If so, could there be a risk of food prices being generalised into core segments?
For clues, one could look at the first quarter results of non-financial corporates announced so far. In a dual-paced economic recovery, termed “K-shaped”, firms could set prices in response to only one segment. That is, a firm could cut prices to target the bottom segment or the lower stroke of K, passing on gains from cheaper inputs and seeking volume growth to drive profits. Or price-setting could target the upper segment, ignoring volume growth and realizing profits from cost-savings or higher prices instead. Early results clearly hint at weak sales realisation with poor volume growth. If such pricing behaviour dominates the formal sector, the risk of passing on any cost increases from higher wage pressures could be greater!
The author is Senior fellow, Centre for Social & Economic Progress (CSEP), New Delhi