How food & fuel continue to haunt RBI

If oversupply of veggies and pulses along with suppressed crude oil prices helped inflation slide till a few months ago, the uncertainty over Kharif farm output and rising global oil prices have now threatened to push inflation up. In either case, the government doesn’t seem to hold much sway.

Inflation that steadily fell mid-2016 onwards and touched the historic low of 1.54% in June this year has been slowly swelling for the past couple of months. Last week, while slashing the economic growth target for the current financial year to 6.7%, the Reserve Bank of India (RBI) raised its retail inflation projection to 4.2-4.6% for the second half after inflation rose to a 5-month high of 3.36% in August.

The steady drop in food prices for nearly a year up to June 2017 was in stark contrast to the previous five years (2011-12 to 2015-16) when they increased at an average annual rate of 6.3%. The years when domestic production and imports consistently lagged the domestic demand are a thing of the past.

Now the country faces the problem of plenty in several items. The popular companions in price swings – potatoes, onions and tomatoes – have perennially brought misery to farmers (and consumers too). Their oversupply wrecked the prices in mandis. The government’s efforts to beef up supply management haven’t had any perceptible impact. In drought or bumper harvest, farmers have remained in continuous distress.

Apart from veggies, there was a massive deflation in the prices of pulses (-24.6%) by July-August 2017, according to the central bank. In the absence of any corrective action, the augmented availability and inadequate procurement/marketing operations led to a supply glut, leaving the food supply logistics in tatters.

Demonetization also had its spillover effect. During the note-ban, firesales set the stage for a plunge in the prices of vegetables such as cabbage, cauliflower, brinjal, gourd, peas and beans during November-December 2016, which usually exhibit little seasonality.

On its part, the government tweaked some export-import policies to augment supply during 2016-17. After having continued with zero import duty on pulses to augment its availability at reasonable prices, the government imposed an import duty of 10% on wheat and tur in a bid to check falling domestic prices. Last month, the government has made tur, moong and urad dal free for exports, after creating adequate buffer stocks of pulses for the first time through involvement of agencies such as the Food Corporation of India (FCI) and others. It tried to discourage hoarding by putting stock limits on pulses for traders, which were eventually lifted in May 2017.

However, agriculture and allied activities recorded a significant deceleration in April-June quarter compared to the previous quarter. South-West monsoon rainfall, which was higher than the long period average (LPA) till the fourth week of July, has turned significantly weak thereafter. As of September 30, 2017, says RBI, 30 sub-divisions in the country, out of 36, received excess/normal rainfall, while the remaining divisions (East and West UP, Haryana, Chandigarh & Delhi, Punjab, East MP and Vidarbha), covering 17% of the sub-divisional area, received deficient rainfall.

So where are we heading with our food prices? Chances are that inflation might go well beyond the RBI's comfort zone of 4%. The central bank, which has erred several times in the past with its inflation projections, is not foolproof either.

The writer is editor, DNA Money.
He tweets @AntoJoseph