How Modi Government Can Rein In Food Inflation On A Sustainable Basis

India’s consumer price index (CPI) inflation rose to 6.07 percent in July, up from 5.77 percent in June. It is now outside the two-four percent tolerance band of headline inflation that the government and the Reserve Bank of India (RBI) have set for themselves.

Both the RBI and the Narendra Modi government have managed inflation well in the past two years despite two back-to-back droughts. However, inflation is again picking up. Should we see this emerging crisis as an opportunity to fix legacy issues like supply side management?

Infosys chair professor for agriculture Ashok Gulati and Indian Council for Research on International Economic Relations (ICRIER) consultant Shweta Saini see this as an opportunity.

They write in The Indian Express today (29 August), suggesting ways to rein in food inflation on a sustainable basis.

Food prices have driven the recent spike in inflation. Gulati and Saini note that while the overall retail inflation in July stood at 6.07 per cent, food inflation was at 8.35 percent and within food, pulses inflation stood at 27.5 percent, sugar at 22 percent and vegetables at 14 percent.

The contribution of food prices is more pronounced at wholesale levels. The duo writes that while the overall wholesale price index (WPI) rose by 3.5 per cent, WPI-food saw a jump of 11.3 percent. Within food, the prices of pulses rose by 36 per cent, sugar by 32 per cent and vegetables by 28 per cent.

As one can see, controlling the prices of pulses, sugar and vegetables are the three major obstacles the government faces in its efforts to bring down the food inflation and in turn the headline inflation itself.

First, let’s take the case of pulses. The good news is that the prices of pulses may come down in coming days as the surplus rains during this monsoon have effectively ended the two-year drought. On top of that, acreage under pulse cultivation in the current kharif season has expanded significantly, driven mainly by increases in minimum support price for pulses. So, out of pulses, sugar and vegetables - factors that contribute to high food inflation, one seems to be under control.

But Gulati and Saini caution against overenthusiasm. They write that for the prices of pulses to stabilise, we need to create a buffer stock and this should be done by procuring pulses from our farmers and not through imports. They advise that the government must strengthen its procurement system as the ‘existing machinery is more attuned to procuring rice and wheat than pulses.’

Then there is a genuine fear that a bumper harvest in pulses may lead to a price crash.

How do we resolve this? Gulati and Saini gives a four-fold solution which involves:

a) Getting the government to procure pulses

b) Encouraging greater private participation by abolishing stocking limits

c) Reintroducing futures

d) Abolishing export bans and imposing an import duty of five to 10 percent.

The second area of concern is sugar prices. Gulati and Saini observe that what is worrying is not that the current sugar inflation is really high but that there no indication that it is going to moderate in near future. They note that the FAO sugar price index for July is up by 54 percent.

The problem gets compounded when one realises that sugarcane acreage is down by eight percent over the last one year. The duo writes that the government did not create a buffer stock when we had bumper sugar production in 2013-2014. Now, we are paying the price of that folly.

But what should we do now? Gulati and Saini point towards India’s restricted and ad-hoc trade policy. They note that since 2010-11, India has been a net exporter of sugar but levies an export duty of (20 per cent) and an import duty of (40 per cent) on sugar at the same time. This makes little sense. To rationalise and facilitate market functions, they advocate abolishing export duty completely and bringing down import duty to five to 10 percent.

The third area of concern is fruits and vegetables (F&V). Here too, lack of storage facilities and inefficient value chains deserve a lot of blame for fluctuations in their prices.

To arrest the price rise of these commodities, Gulati and Saini recommend reducing farmers’ dependence on Agriculture Produce Market Committees (APMCs) by delisting F&V from APMC regulation and freezing agent commissions in regulated mandis at no more than one percent. (Maharashtra has initiated this process and has been quite successful in the experiment)

Gulati and Saini believe that the success story of operation flood (white revolution) can be replicated in F&V by “encouraging organised food retailers and processors to build value chains — starting from direct purchases from farmers, aggregating, grading, assaying, packing and bar-coding at the village level itself through Farmer Producer Organisations.”

The government would do good in controlling inflation if it heeds to the duo’s advice.