With caution on food inflation

Assured procurement and trade liberalisation could help keep pulses, sugar and vegetable prices down

With caution on food inflation
The Consumer Price Index (CPI) inflation has dipped sharply to a one-year low of 4.31% compared to 5.05% in August. (Reuters)

In his Independence Day speech, prime minister Narendra Modi counted his government’s several achievements. Bringing down inflation from double-digit figures to below-6% was vociferously mentioned as one that brought relief to the aam aadmi.

Without doubt, we witnessed moderation in overall consumer price index (CPI) and wholesale price index (WPI) levels in the past two years.

However, how much of it was due to government policies, especially those of RBI, and how much was due to the global commodity price slump is debatable. The global food price index of FAO fell by more than 20% in last two years.

In any case, analysis of Indian inflation is incomplete without looking at its food price component. It is critical given that an average household spends 45% of its expenditure on food; poor ones, even more.

From that perspective, while overall retail inflation in July (yearly) stood at 6.07%, food inflation (CFPI) was at 8.35%. Within food, pulses inflation stood at 27.5%, sugar at 22% and vegetables at 14%! At wholesale levels, price rise was much steeper—between July 2015 and 2016, overall index rose by 3.5% and WPI Food by 11.3%. Within food, pulses’ prices rose by 36%, sugar by 32% and vegetables by 28%!

Such price spikes for selected food items are worrisome. Also, since significant increases in salaries under the Seventh Pay Commission have yet to play out with regards to expenditure, one needs to remain cautious on the food price front.

Amidst this anxiety, however, there is some good news, too. High pulses’ prices and good monsoon rains in most pulses-growing states have led to area under kharif pulses increasing by 33% over last year. This may give a bumper crop of kharif pulses, easing price pressures during October to January.

Clearly, our farmers are price-sensitive, and therefore, to ensure a sustained growth in pulses’ acreage, favourable relative price incentives need to be maintained. If bumper harvest leads to a price crash, it may drive farmers away from pulses in the next season. Solution to this is four-fold: get the government to procure pulses, encourage greater private participation by abolishing stocking limits, facilitate commodity market operations by reintroducing futures and free international trade by abolishing export bans, and imposing import duty of 5-10%.

In Parliament, finance minister Arun Jaitley announced his government’s resolve to reduce and stabilise pulses’ prices by creating a buffer stock of 2 million tonnes (mt).

The coming harvest season will be the most opportune time to do so by procuring from Indian farmers than by importing from abroad. But existing government procurement machinery is more attuned to procuring rice and wheat than pulses- that require an operationally different treatment. This necessitates gearing up the system accordingly, well in time.

We next look at sugar. With 32% wholesale price inflation and 22% retail inflation, sugar is really making the food basket bitter for the common man. Worse still, there are not much chances of its moderation in the near future. Sugarcane acreage is down by 8% over last year as farmers had bitter experience over payments from sugar mills in the last two seasons.

The carryover sugar stocks are also low and global prices of sugar are surging. Within a year, FAO sugar price index for July is up by 54%! Had the government created a buffer of 2-3 mt in 2013-14 when India had witnessed bumper sugar production, the situation would have been sweeter.

There is a fascinating policy paradox in the sugar-trade policy. Since 2010-11, India has been a net exporter of sugar but its trade regime has been highly restricted and ad-hoc.

In fact, India just may be the only country in the world with an export duty (20%) and an import duty (40%) on sugar at the same time! Apart from it being counter-intuitive, the policy is both anti-farmer and anti-consumer! The time to rationalise this is now. To facilitate market functions, reduce sugar import duty to say 5-10%, and abolish export duty.

Next up are vegetables and fruit. The aam aadmi is already suffering from high prices of dal (pulses), and now even subzi and phal are slipping from his thali. High wastages—due to inappropriate post-harvesting practices and the lack of storage and efficient value-chains—make supplies unpredictable every season.

The solution lies in streamlining the entire ecosystem in the fruits-and-vegetables (F&V) market on the lines of Operation Flood that was carried out for milk.

Start by de-listing F&V from APMC regulation and simultaneously freeze agent commissions in regulated mandis at no more than 1%.

This should be strategically preceded by initiatives for expanding F&V wholesale market network by providing land and infrastructural support and by encouraging and facilitating direct farmer markets in at least major cities like Delhi and Mumbai.

This way the farmer’s dependence on APMC markets and commission agents will gradually reduce, and farmers can get a better price for their produce while consumers still pay a low price. Maharashtra chief minister Devendra Fadnavis has set a great example by opening the Assembly premises for farmers’ markets and assuring availability of school/college premises during holidays.

Combining the above initiatives with a policy environment that incentivises organised food retail and processing to build value-chains for F&V—starting from direct purchases from farmers to aggregating, grading, assaying, packing, bar-coding, at the village level itself through Farmer Producer Organizations (FPOs)—the sector can repeat the same growth story as milk (Operation Flood).

The road is long and treacherous, but the destination is worth it. By reforming the existing system and performing based on a clear-defined strategy, the government can transform the sector. Can the Modi government harness the opportunity hidden in this brewing crisis to rein-in food inflation on a sustainable basis? Only time will tell.

Gulati is Infosys chair professor for agriculture and Saini a consultant at ICRIER

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First published on: 29-08-2016 at 06:20 IST