The escalation of prices for essential food items in India, driven by irregular and insufficient rainfall, has compelled the government to implement a series of measures aimed at bolstering supplies and alleviating the pressure of inflation.
While the annual retail inflation surged to a 15-month peak of 7.44% in July, food price inflation soared to 11.5%, the highest in over 3½ years. Consequently, Prime Minister Narendra Modi’s administration swiftly moved to take action to prevent any potential backlash from voters in the upcoming state and national elections.
To mitigate the challenges faced by low-income consumers, the government is contemplating an extension of a free food program, which is scheduled to conclude in December. Two undisclosed government sources indicated that discussions were underway, but declined to reveal their identities due to a lack of media authorization for their statements.
The government’s estimated cost for food subsidies is projected to be around 1.97 trillion Indian rupees ($23.83 billion) in the fiscal year 2023/24. Expanding the free food scheme could raise this expenditure further.
In response to the situation, the government has intensified the distribution of subsidized vegetables, particularly onions and tomatoes, through its supply network. Additionally, stocks of wheat and sugar have been released into the market to temper price escalations.
According to information from government sources, these measures collectively could incur a cost exceeding $12 billion.
Furthermore, the government is poised to impose its first sugar export ban in 7 years, following the recent prohibition of certain rice categories. There are also reports that the government is contemplating wheat imports for the first time in years.
While the government is more concerned about cereals and pulses, which carry the most weight in the consumer food basket, than perishable items, another undisclosed government source revealed that the government would avoid impulsive actions and instead take a proactive approach to curbing inflation.
Neither the Finance Ministry nor the Prime Minister’s Office responded to inquiries via email and messages seeking comments.
Gaura Sen Gupta, an economist at IDFC First Bank Economic Research, noted, “While the month-on-month momentum of food prices has eased in August partly due to the government’s interventions, uncertainty over the impact of weak rains remains high.”
IMPACT OF SUPPLY DISRUPTIONS Following above-average rainfall in July, the initial three weeks of August have experienced an uncharacteristic dry spell, affecting prices of kitchen staples such as cereals, vegetables, sugar, spices, meat, and dairy products.
Harish Galipelli, director of trading firm ILA Commodities India Pvt Ltd, explained, “Crops are not receiving the necessary rainfall when they need it the most.”
Record-high tomato prices have led households to reduce consumption, prompting fast food chains like McDonald’s and Subway to temporarily remove them from their menus.
Mohammad Siraj, a farm worker in the northern state of Uttar Pradesh earning 250 rupees ($3.03) daily to support his family of eight, lamented, “It has been two months since I bought tomatoes, and we do not regularly consume pulses anymore. Often, we just eat rotis and salt for dinner.”
Erratic rainfall in some northern states submerged India’s rice crop in July, severely impacting it. A dry spell now threatens yields in southern and eastern states.
Nitin Kalantri, a pulses trader, indicated that the dry spell’s impact on pulse yields could keep prices elevated for more than a year.
Although India is striving to enhance pulse supplies through imports, there is only a limited surplus available from countries such as Australia, Mozambique, Myanmar, and Tanzania.
Sugar prices are projected to increase as demand improves during upcoming religious festivals, and uncertainties regarding supplies for the next season also persist.
The outlook for both summer and winter crops is marked by increased uncertainty, with a 95% likelihood of El Nino prevailing from December 2023 to February 2024. In addition to causing reduced rainfall, El Nino also leads to above-normal temperatures.
“A winter heatwave could trigger a second phase of price increases,” warned a dealer in Mumbai affiliated with a global trade house.
($1 = 82.4700 Indian rupees)
