Food Prices

Learn from 2014: How the Modi govt can tame food prices

foodVivek Kaul

Earlier this month, the the India Meteorological Department(IMD) forecast that the monsoon will be deficient this year. It said that the monsoon will be 88% of the long-term average. This number is lower than the 93% of the long-term average number, the IMD had forecast in April, earlier this year.
The IMD also said that the probability of a deficient monsoon was as high as 66%. The nation’s weather forecaster uses rainfall data for the last 50 years to define what is normal. If the rainfall forecast for the year is between 96% and 104% of the 50 year average, then it is categorised as normal. A forecast of between 90% and 96% of the 50 year average is categorised as below-normal. And anything below 90% is categorised as deficient.
Hence, a forecast of 88% of the long-term average means that the monsoon will be deficient this year. Further, with the rainfall being forecast as likely to be deficient, the fear is that food prices will start to go up during the months to come.
Data from the World Bank suggests that only around 35.2% of agricultural land in India was irrigated in 2010. The bank defines irrigated land as “areas purposely provided with water, including land irrigated by controlled flooding.” This number is a little dated but does tell us that a major part of Indian agriculture continues to remain dependent on rainfalls.
And if rainfalls turn out to be deficient chances are there will be an impact on agricultural production and in the process push up food prices. At least that is how things look theoretically. Nevertheless, things may not be as bad as they are being made out to be.
During 2014 monsoon season, the country as a whole received rainfall which was 88% of the long-term average. Hence, the rainfall last year was deficient. In fact, if we look at the numbers region-wise, the rainfall was around 79% of the long-term average in north-western India. States like Punjab, Haryana and Uttar Pradesh which produce a major part of food grains produced in India, come under this region.
Despite this, the impact on production was limited because these states have access to irrigation. As a recent report by Crisil Research titled A washout monsoon forecast, we cut GDP growth by 50 bps points out: “Given their reasonably high irrigation levels, agricultural production in Punjab (98% of total area cultivated has irrigation), Haryana (85%) and Uttar Pradesh (76%) were less affected by deficient rainfall last year.”
The question is how effective will the irrigation systems be the second time around. “Even with good irrigation cover in these states, two consecutive years of weak rainfall would bring down the effectiveness of irrigation systems…Ground water is recharged mainly through rainfall. As per IMD, rainfall deficiency in Punjab was 50% and Haryana at 56% last year. As a result, with agriculture relying more on ground water, two consecutive years of weak monsoon will have a significant impact on kharif crops. Plus reservoir storage levels in some states are alarmingly low,” Crisil Research points out. Given this, there will be some impact on agricultural production.
Hence, the government needs to act decisively and quickly to ensure that food prices do not go. As economists Taimur Baig and Kaushik Das of Deutsche Bank Research point out in a recent research note titled RBI signals no more cut; we still see room: “In 2002 and 2004, cumulative rainfall was down 19 % and 14% respectively, but thanks to an effective undertaking by the government that saw large scale disbursement from the government’s food stocks, inflation remained under control.”
In fact, the Narendra Modi government did the same thing when it came to power in May last year. One of the first decisions made by the government was to release 5 million tonnes of rice into the open market from the stocks maintained by the Food Corporation of India. News reports suggest that eventually only around 2 million tonnes was sold. But just the news that the government was selling was enough to contain inflation.
As Baig and Das point out: “Last year, a late start of the monsoon rains resulted in a sharp spike in food prices during July (+3.6% month on month). Food prices generally tend to be high in July, but the spike in 2014 was striking. The newly elected government responded with a number of administrative measures (open market sale of key foodgrains, crackdown on hoarders, imposing restriction on stocking limits of key vegetables etc.), which helped food prices to eventually ease from September onward.”
Also, imports will help, given that global food prices are at a six year low. As Crisil Reearch points out: “Importing some commodities will be useful, especially because global food prices have slumped to a six-year low following a bounteous output – international prices of oil seed prices for instance are down 24% year-on-year.”
While prices of food grains can be contained by releasing government stock into the open market, such a thing is not possible in case of vegetables, given their short shelf life. Hence, it is important that the government cracks down on hoarders, like it did last year.
As Ashok Gulati, former Chairman of the Agricultural Costs and Prices, wrote in a column inThe Financial Express: “A slew of measures were announced by the government to contain the damage from surging food inflation. It not only restricted exports of onions but also imported onions and dumped them in major onion markets at prices below import cost. It also used the stick and raided many onion traders/hoarders.”
While onions can be stored, this may not be true for most other vegetables. Also, a lot of vegetable produce goes bad before it reaches the market, hence, “lowering transportation losses will be crucial”.
Further, there will be great pressure on the government to increase the minimum support prices on agricultural crops. That is one sure fire way of pushing up food inflation.
It is worth remembering here that not many farmers benefit from the minimum support price system. The government announces the minimum support price of 24 agricultural crops, but largely buys, only two, wheat and rice, through the Food Corporation of India and other state procurement agencies.
The Shanta Kumar committee report points out that the total number of agricultural households who were able to sell rice paddy and wheat to the procurement agencies was 5.21 million. “The number of households comes to just 5.21 million (2.55 million paddy households during July-Dec 2012; 0.55 million paddy households during Jan-June, 2013; and 2.11 million wheat households during Jan-June 2013),” the report points out.
The figure of 5.21 million forms 5.8% of the total number of agricultural households of 90.2 million. In fact, this number is also on the higher side once one takes into account the fact that there are households that sell both paddy and wheat to the procurement agencies. Further, not all wheat and paddy is sold to procurement agencies at the minimum support price.
Once these factors are taken into account the minimum support price system doesn’t benefit many farmers and causes food inflation. Hence, it is important that the government stays away from the temptation of increasing minimum support prices by a big amount, something that it did last year as well.
To conclude, in order to control food inflation, it is important that the government do same things that it did last year.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on June 11, 2015

What the latest WPI number tells us about the Indian economic story

InflationVivek Kaul

Inflation as measured by the wholesale price index(WPI) fell to a eight month low of 5.05% in January 2014. On the face of it, it might seem like a reason to rejoice, but the devil as they say always lies in the detail.
Around 65% of the wholesale price index is made up of manufactured products. The rate of inflation for manufactured products stood at 2.76%. In comparison, this had stood at 4.96% in January 2013.
On the other hand the price of food articles which constitute around http://teekhapan.wordpress.com/2014/02/14/food-inflation-is-down-but-the-figure-raghuram-rajan-is-watching-hasnt-even-budged/14.3% of the index rose by around 8.9%. In comparison, the rise had been at 12.4% in January 2013.
Vegetable prices went up by 16.60% (in comparison to over 30% during the same period last year). The price of rice was up by 13.4% (in comparison to 17.8% during the same period last year). The price of Egg, Meat and Fish went up by 10.9% (in comparison to 11.2% during the same period last year).
If India has to get economic growth going again, the manufacturing inflation needs to rise from its current level and the food inflation needs to fall further. For more than five years, food inflation has been very high. High inflation has eaten into the incomes of people and led to a scenario where their expenditure has gone up faster than their income. This has led to people cutting down on expenditure which is not immediately necessary.
When people cut down on expenditure, the demand for manufactured products falls as well. This is reflected in the rate of inflation for manufactured products which stood at 2.76% in January 2014. Interestingly, this is also reflected in the consumer durable number( a part of the index industrial production from a use based point of view), which fell by 16.2% in December 2013.
At a more practical level it is reflected in the falling car sales numbers. The domestic car sales number stood at 1,60,289 units in January 2014, falling from 173,449 units in January 2013. The two wheeler sales went up by just 5% to 179,576 units in January 2014 over January 2013.
With high inflation eating into the incomes of people it is not surprising that they are cutting down on their expenditure. Also, high inflation has prevailed for close to five years now. Given this, a fall in overall inflation, as it has over the last couple of months, will not immediately lead to increased consumption. People need a little more evidence of falling inflation before they decide to open up their purses. This means, that overall inflation (as measured through the wholesale price index or the consumer price index for that matter) needs to continue to fall over the next few months, for consumer demand to return. Whether that happens remains to be seen.
While food inflation has been falling, the inflation at the retail level still continues to be strong. If one looks at core retail inflation (i.e. non food non fuel inflation which forms around 40% of the consumer price inflation index) it continues remains to be high at 8%.
The core inflation contains measures of housing, medical care, education, recreation, transport, personal care etc, basically, everything that is required for a reasonably comfortable living.
If consumer demand has to return, the core retail inflation needs to come down from a level of 8% to close to 5-6%.
What makes a fall in core retail inflation even more important is the fact that the items that constitute it (i.e. housing, medical care, education, recreation, transport, personal care etc) are the ones that consumers deal with on an almost daily basis. And they will not feel inflation has come down, unless the price rise of these items starts to slow down.
This number is closely tracked by the Reserve Bank of India(RBI) as well. The RBI governor Raghuram Rajan had said on January 29, 2014, “that he would have liked to see a greater reduction in core inflation.”
Also, food inflation needs to continue to fall. Its the high price of food that feeds into wages and thus leads to high levels of core retail inflation. Once that is brought under control, consumer demand will return, and will start to reflect in higher manufactured products inflation and a better index of industrial production number (which stood at -0.6% in December 2013).
And that, in turn, is likely to show up in higher economic growth.

The article originally appeared on www.FirstBiz.com on February 14, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

If only Raghuram Rajan could control onion prices too

ARTS RAJANVivek Kaul
On November 12, the rupee touched 63.70 to a dollar. On November 13, Raghuram Rajan, the governor of the Reserve Bank of India (RBI) decided to address a press conference. “There has been some turmoil in currency markets in the last few days, but I have no doubt that volatility may come down,” Rajan told newspersons.
Rajan was essentially trying to talk up the market and was successful at it. As I write this, the rupee is quoting at at 63.2 to a dollar. The stock market also reacted positively with the BSE Sensex going up to 20,568.99 points during the course of trading today (i.e. November 14, 2013), up by 374.6 points from yesterday’s close.
But the party did not last long. The wholesale price inflation (WPI) for October 2013 came in at 7%, the highest in this financial year. In September 2013 it was at 6.46%. In August 2013, the WPI was at 6.1%, but has been revised to 7%. The September inflation number is also expected to be revised to a higher number. The stock market promptly fell from the day’s high.
A major reason for the high WPI number is the massive rise in food prices. Overall food prices rose by 18.19% in October 2013, in comparison to the same period last year. Vegetable prices rose by 78.38%, whereas onion prices rose by 278.21%.
Controlling inflation is high on Rajan’s agenda. “Food inflation is still worryingly high,” he had told the press yesterday. In late October, while announcing the second quarter review of the monetary policy Rajan had said “With the more recent upturn of inflation and with inflation expectations remaining elevated… it is important to break the spiral of rising price pressures.”
If Rajan has to control inflation, food inflation needs to be reined in. The trouble is that there is very little that the RBI can do in order to control food inflation.
A lot of vegetable growing is concentrated in a few states. As Neelkanth Mishra and Ravi Shankar of Credit Suisse write in a report titled Agri 101: Fruits & vegetables—Cost inflation dated October 7, 2013, “While the Top 10 vegetable producing states contribute 78% of national production, the contribution of West Bengal, Orissa and Bihar is much higher than their contribution to overall GDP. For example, despite being just 2.7% of India’s land area and 7.5% of population, West Bengal produces 19% of India’s vegetables, dominating the production of potatoes, cauliflowers, aubergines and cabbage. In fact, for almost each crop, the four largest states are 60% or more of overall . In particular, Maharashtra dominates the onion trade (45% of national production by value), while West Bengal produces 38% of India’s potatoes, 49% of India’s cauliflower and 27% of India’s aubergines (brinjal). ”
The same stands true for fruits as well. As the Credit Suisse analysts point out “Maharashtra (MH) dominates citrus fruits (primarily oranges), Tamil Nadu (TN) produces nearly 40% of India’s bananas, Andhra Pradesh (AP) is Top 3 in all the three major fruits, and Uttar Pradesh (UP) produces a fifth of India’s mangoes.”
Hence, the production of vegetables as well as fruits is geographically concentrated. What this means is that if there is any disruption in supply, there is not much that can be done to stop prices from goring up. Given the fact that the production is geographically concentrated, hoarding is also easier. Hence, it is possible for traders of one area to get together, create a cartel and hoard, which is what is happening with onions. (As I argue here). There is nothing that the RBI can do about this. What has also not helped is the fact that the demand for vegetables has grown faster than supply. As Mishra and Shankar write “Supply did respond, as onion and tomato outputs grew the most. But demand rose faster, with prices supported by rising costs.” Hence, even if food inflation moderates, there is very little chance of it falling sharply, feel the analysts.
This is something that Sonal Varma of Nomura Securities agrees with. As she writes in a note dated November 12, 2013 “On inflation, vegetable prices have not corrected as yet and the price spike that started with onions has now spread to other vegetables. Hence, CPI (consumer price inflation) will likely remain in double-digits over the next two months as well.” The consumer price inflation for the month of October was declared a couple of days back and it was at 10.09%.
Half of the expenditure of an average household in India is on food. In case of the poor it is 60% (NSSO 2011). The rise in food prices over the last few years, and the high consumer price inflation, has firmly led people to believe that prices will continue to rise in the days to come. Or as economists put it the inflationary expectations have become firmly anchored. And this is not good for the overall economy.
As Varma puts it “For a sustainable decline in inflation to pre-2008 levels, the vicious link between high food price inflation and elevated inflation expectations has to be broken. The persistence of retail price inflation near double-digits for over five years has firmly anchored inflationary expectations at an elevated level. The role of monetary policy in tackling food price inflation is debateable.”
What she is saying in simple English is that there not much the RBI can do to control food inflation. It can keep raising interest rates but that is unlikely to have much impact on food and vegetable prices.
Varma of Nomura, as well as Mishra and Shankar of Credit Suisse expect food inflation to moderate in the months to come. But even with that inflation will continue to remain high.
As Varma put it in a note released on November 14, “Looking ahead, we expect vegetable prices to further moderate from December, which should lower food inflation. However, this is likely to be offset by other factors. Domestic fuel prices remain suppressed and the release of this suppressed inflation (especially in diesel) will continue to drive fuel prices higher. Also, manufacturer margins remain under pressure and hence the risk of further pass-through of higher input prices to output prices, i.e., higher core WPI inflation, is likely.”
What this means is that increasing fuel prices will lead to higher inflation. Also, as margins of companies come under threat, due to high inflation, they are likely to increases prices, and thus create further inflation.
All this impacts economic growth primarily because in a high inflationary scenario, people have been cutting down on expenditure on non essential items like consumer durables, cars etc, in order to ensure that they have enough money in their pockets to pay for food and other essentials. And people not spending money is bad for economic growth.
If India has to get back to high economic growth, inflation needs to be reined in. As Rajan wrote in the 2008 Report of the Committee on Financial Sector Reforms “The RBI can best serve the cause of growth by focusing on controlling inflation.” The trouble is that there is not much that the RBI can do about it right now.
The article originally appeared on www.firstpost.com on November 14, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)