June 18, 2024

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With food inflation limited to dal roti, why govt policy may need changes | Explained News

With consumer food prices 9.9% higher year-on-year in August and overall retail inflation at 6.8% – well above its target of 4% and upper tolerance limit of 6% – the Reserve Bank of India (RBI) is understandably worried.

That’s apparent from its monetary policy committee’s statement on Friday: “…the unprecedented food price shocks are impinging on the evolving trajectory of inflation and [the] recurring incidence of such overlapping shocks can impart generalisation and persistence”.

Those worries are shared no less by the Centre, particularly with national elections scheduled six months from now. Consumer food price inflation averaged a mere 0.4% during the 12 months leading to the Lok Sabha polls of April-May 2019. The importance of not allowing it to spiral and translate into generalised inflation ahead of April-May 2024 is obviously not lost on the Narendra Modi government.

Dal-roti inflation

A closer look, however, shows food inflation being increasingly driven by two items: Cereals (11.9% in August) and pulses (13%).

While the annual retail price rise in vegetables was even higher, at 37.4% in July and 26.1% in August, that figure is likely to moderate significantly – and also reflect in the official inflation data for September to be released later this week. The best indicator is tomato, the retail inflation for which stood at a mindboggling 202.1 % in July and 180.3% in August. The current all-India modal (most-quoted) retail price of tomato is only Rs 20 per kg, as against Rs 40 a month ago and Rs 130 two months ago.

Festive offer

If prices of vegetables (sabzi) have already started correcting, it reduces food inflation essentially to dal (pulses) and roti (cereals). This has implications for the RBI’s and the government’s strategy of keeping food inflation low at all costs.

Most governments naturally tend to privilege consumers over producers. It makes political sense, as the former outnumber the latter. But there are times when governments have to pay heed to producers too. In the present context, that applies at least to two agricultural/food commodities.

The first is vegetable oils

Harvesting and marketing of soyabean has barely started, but the oilseed is already trading below the government’s minimum support price (MSP) of Rs 4,600 per quintal.

At Madhya Pradesh’s (MP) Dewas agriculture produce mandi, soyabean containing 10-11% moisture is fetching Rs 4,500/quintal. Prices are lower, at Rs 4,200-4,300, for the seed with 12-13% moisture.

“The crop is good this year, but not prices. Demand for both oil and meal (the residual de-oiled cake, used as livestock feed ingredient) is weak,” noted Suresh Mangal, a leading commission agent at one of India’s largest wholesale market for soyabean.

Bumper crop apart, a major reason for the bearish market sentiment has to do with record imports of edible oil. India’s vegetable oil imports are projected to touch an all-time-high of 17 million tonnes (mt) in 2022-23 (November-October), compared with 14.4 mt in the previous marketing year.

The flood of imports has been enabled by falling international prices and also low tariffs. The effective import duty is currently 5.5% on crude soyabean, palm and sunflower and 13.75% on refined oils.

The landed price (cost plus insurance and freight) of imported crude soyabean oil is now about $975 per tonne, nearly half of the average of $1,854 in March 2022 immediately after Russia’s invasion of Ukraine. Import prices of other oils – crude palm ($1,828 to $855), sunflower ($2,125 to $905) and refined palmolein ($1,812 to $845) – have plunged even more over this period (chart).

veg oil prices

Farmers have planted soyabean on 12.6 million hectares (mh) area this kharif season, including 5.3 mh in MP, 5.1 mh in Maharashtra and 1.1 mh in Rajasthan. With MP and Rajasthan due for assembly polls in November-December, the Modi government may come under pressure to hike the import duty on vegetable oils; it wouldn’t want soyabean selling below MSP becoming a political talking point.

The second item – Milk

October-March is normally the “flush” season for milk. The drop in temperatures and humidity levels – plus improved fodder, straw and feed availability from the monsoon rain and harvested kharif crop – is conducive for buffaloes and cows to calve and produce more milk.

Last season saw quite the opposite. Low prices received during the Covid-induced economic lockdowns of 2020 and 2021 led to the underfeeding of animals, alongside shrinkage of herd sizes, by farmers. The effects of it – the underfed calves and pregnant/dry cattle turned out to be poor milkers – were felt in the 2022-23 “flush”.

Milk shortages peaked in February-March 2023. Dairies in Maharashtra then paid up to Rs 38 for a litre of cow milk with 3.5% fat and 8.5% solids-not-fat content, even as ex-factory prices of yellow butter and skimmed milk powder soared to Rs 430-435 and Rs 315-320 per kg respectively.

Those rates have since plummeted to Rs 32-33, Rs 355-360 and Rs 255-260 levels. The reason: Farmers ramping up production in response to the high milk prices and showers through the pre-monsoon and monsoon months (barring August) helping boost fodder supplies. Enhanced availability of oilcakes from the kharif soyabean, cottonseed and groundnut crops should further ease feed costs.

With the “flush” season taking off, milk is in surplus now. “There isn’t much buying of powder, butter or ghee happening. It will be worse once the festival (Dussehra-Diwali) season ends and the animals enter peak production in winter,” said Ganesan Palaniappan, a Chennai-based dairy commodities trader.

Compounding the industry’s problems is the reported spurt in sales of ghee adulterated with vegetable fat. The crash in prices of imported oils, especially palm, has made admixture of cheap fat in butter and ghee that much more attractive.

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“A 15-kg tin of pure ghee costs around Rs 7,700 today. The same tin containing adulterated ghee is available at Rs 5,000-5,200. All this is putting further downward pressure on milk fat prices, ultimately affecting our dairy farmers,” added Palaniappan.

Key takeaway

In the coming days, the government may have to take a more nuanced approach to food inflation balancing both consumer and producer interests.

The current sledgehammer approach of bringing down food inflation at all costs can politically backfire in states where farmers are a decisive vote bank. Nor is it probably required when food inflation, thanks to the monsoon’s recovery in September, is now becoming less generalised and confined largely to dal-roti.