India’s latest episode of inflation holds lessons in its management

Inflation estimates released earlier this month confirmed the fear of persistent food inflation. The headline rate for July based on the consumer price index (CPI) was at 7.44%, the second-highest after April 2022, with food inflation at 11.5%, which was the highest since January 2020. These signal that the threat of inflation is real and likely to persist longer than imagined.

While vegetable inflation at 37% draws attention, it is only a marginal factor. Tomato inflation in July and onion price pressures in August are unlikely to sustain. The real issue is inflation in cereals and pulses at 13% and 13.3%, respectively. Cereal inflation has been in double-digits since August 2022, while pulses inflation has risen sharply in the last three months. And it is not just retail, but also wholesale prices, which suggests that these price pressures are part of a larger trend. The wholesale price index (WPI)-based inflation for cereals was at 8.3% and for pulses at 9.6%. With WPI inflation overall negative for four months in a row, demand tightening is unlikely to be a reason for these inflationary pressures. The sustained inflationary trend in cereals, rice and wheat is also in spite of an attempt by the government to cool down prices by offloading public stocks.

So why are cereal prices rising? Inflation in wheat is partly due to domestic factors and partly a result of international price transmission. Globally, wheat prices rose due to the Russia-Ukraine war, but came down subsequently. They are rising again after the international Black Sea grain deal fell apart. Domestically, wheat output has suffered for the past two years because of a heatwave and unseasonal rains. Even though official estimates suggest a negligible decline in output, these are at variance with market estimates. Ad-hoc measures by the government have also contributed to wheat-price uncertainty, with the imposition of stock limits on 12 June further strengthening domestic prices. For rice too, market estimates point to lower output than government projections. Unseasonal rains and floods in India’s northern and western states along with a deficient monsoon in major rice-growing states of eastern and southern India have caused anxiety over rice production shortfalls. India’s decision to ban the export of non-basmati rice has meant that international rice prices are also rising. For pulses, the price rise is largely a result of 10% lower sowing due to an erratic monsoon.

Other than cereals and pulses, another commodity that could fuel high food inflation in the near future is edible oil. Though oil and fat inflation has been negative for the last six months due to a high base effect, these could reverse soon with edible oil prices internationally on the rise, which is a result of output drops in big oil-producing countries and rising petroleum prices. Edible oil prices are largely determined by international prices, as India imports more than 60% of its needs.

Such uncertainty and climate shocks require a measured response from the government. However, its response so far has been reactive and ad hoc. The latest instance of a steep export duty on onions is an example. So is the clamp on the export of non-basmati rice. Such unpredictable and half-measured responses are unlikely to stabilize their prices. Also, the use of stock limits and market restrictions is usually counterproductive. Further, the objective of such a price-targeting policy is limited to protecting the consumer, even if it is at the cost of farmers. Production and stock estimates are basic information needed for a realistic assessment of the situation. Unrealistic estimates raise fears and lead to speculative pressures.

While there are no short-cuts to deal with such inflationary episodes, there are certainly lessons for India’s medium- and long-term agricultural policy. First, there is an urgent need to insulate the production of essential food items such as cereals, pulses and edible oil from climate shocks, which are likely to get more frequent. Sudden inflationary episodes such as those in pulses and oilseeds are a reminder of the necessity to increase domestic production and insulate the economy from international price transmissions, given our high import dependence. Also, transparent and reliable estimates of production, stocks and domestic availability are necessary to reduce speculative price pressures. Finally, it is time to re-examine the current framework of price policies, which are largely ad hoc, use outdated and irrelevant instruments, and are reactive rather than proactive. India must act in support of food security and provide stable prices to consumers, but also protect the incomes of farmers.