TOPIC: MONSOON AND FOOD INFLATION: A CRITICAL ANALYSIS

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THE CONTEXT: With erratic monsoon, a turnaround in rainfall has led to worrying trends for rising food inflation in the country. Apart from natural causes, there is a rise in artificial reasons as well, which is making the last-mile fight against inflation tougher. In this context, this article analyses the issue in detail from the UPSC perspective.

WHAT IS HAPPENING?

• India’s retail inflation had risen to 4.8% in June on high food prices which is higher than economists’ expectations of 4.3-4.6%.
• According to Crisil economists, food products account for a 39% weight in the inflation basket and vegetables and is the most volatile component.
• The Consumer Food Price Index (CFPI) in June increased to 4.49% from 2.91% in May because of late rains in different parts of the country.
• Vegetables, which have a 6% weight in the retail basket, were still in deflation in June owing to base effects, but rose 12.2% sequentially. These are affected more than cereals by extreme weather events, local supply disruptions and wastage.

• While most economists believe the inflation rate certainly will remain sticky, it will not prompt the Reserve Bank of India (RBI) for another rate hike.
• Despite late arrival, the monsoon staged a recovery leading to a surge in kharif crop plantings, which is likely to impact food inflation positively.
• However, Monsoon has been normal/above-normal at an all-India level over the past four years. Predictably, foodgrain production has risen in these years. Even then, food inflation, as measured by CPI, remained above 6% in three of these four years.

WHAT IS INFLATION?

• Inflation is the rate of increase in prices over a given period of time. It is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country.
• It effectively measures the change in the prices of a basket of goods and services in a year. In India, inflation is calculated by taking the WPI as a base.
• It occurs due to an imbalance between demand and supply of money, changes in production and distribution costs or increases in taxes on products.

CAUSES OF FOOD INFLATION

DELAY IN MONSOON

• The southwest monsoon had an abysmal start, arriving seven days late on June 8.
• Rainfall for the country was 52.6% below the normal (long-period average) during the first two weeks, with 10.1% cumulative deficiency even at the end of June.

EL NINO CAUTION

• There is uncertainty related to El Nino, which is known to suppress rainfall in India, where the impact can extend to the rabi season.
• El Nino has usually led to deficient rainfall in India. Since 1991, there have been six occurrences, and rainfall was deficient in five. The last El Nino event was in 2015.
• El Nino, which has a bearing on India’s southwest monsoon, could impact agricultural production and, in turn, may result in high food inflation.

EXTREME WEATHER EVENTS

• Extreme weather events such as unusual rains and heat waves are growing risks.
• Last fiscal, despite a normal monsoon, food output was hit by a heatwave in March 2022 and unseasonal rains in October 2022 and in March 2023.
• In this fiscal so far, excess rains have already delayed sowing in the beginning of the kharif season.
• Any more such incidents risk damaging standing crops and yields.

DOMESTIC CAUSES

• Apart from natural causes, there are few artificial domestic causes as

1. Artificial hoarding: It is one of the significant factors that often causes inflation is hoarding by traders.

2. Macroeconomic issues in India: There are issues such as domestic policies and the lagged impact of the previous year’s production that influence final inflation outcomes.

3. The weak currency also played a role in higher inflation spikes in the past headwinds from weak external demand.

GLOBAL CAUSES

• Few of the global causes for food inflation:

1. Volatility in global financial markets

2. Protracted geopolitical tensions due to Russia-Ukraine war

• • As until 2019-20, India was importing an average 0.2 mt of sunflower oil every month which fell to 0.15-0.16 mt led to rise in prices of edible oil.
  • Also war induced disruptions led to cut in fertilizer shipments from the world’s largest suppliers, threatening global food security.

3. Global food supply disruptions due to trade restrictions.

IMPLICATIONS OF FOOD INFLATION

IMPACT ON SOWING

• Monsoon’s turnaround can impact kharif crop planting as the bulk of kharif sowings happen from mid-June to mid-August, and rainfall decides how much area is covered.
• The same rain helps fill up reservoirs and ponds and recharge groundwater tables, which provide moisture for the subsequent rabi winter-spring crops.

LOW BUFFER STOCKS

• Due to low rainfall and low crop production, there is high chances of low buffer stocks.
• It is evident that with 71.1 million tonnes (mt) as on July 1, rice and wheat stocks in government godowns were the lowest in five years for this date while also affecting the rural economy.

IMPACT MARKET DYNAMICSIMP

• While deciding on the monetary policy, the RBI closely monitors food inflation since it accounts for nearly half of the CPI inflation, i.e. 39 per cent of the consumer-price index.
• In this regard, high food inflation can lead to a rise in interest rates, flattening of equity prices and hardening of bond yields.

CHALLENGES RELATED TO THE INFLATION CONTROL

SUPPLY CHAIN HURDLES

• There are many persistent challenges in the Food Supply Chain in India, leading to mismanagement of resources and lead inflation.
• A few of them are Farming and Labor Shortages, Lack of Traceability., Communication Breakdowns, and Poor Inventory Control.

ISSUES RELATED TO DIRECT AND INDIRECT FARM SUBSIDIES

• Subsidies are ruined with corruption and leakages due to the presence of intermediaries.
• For example, in PDS, the presence of ghost beneficiaries, and leakages are observed.

ISSUES RELATED TO BUFFER STOCKS AND FOOD SECURITY

• There are issues related to warehousing, including a lack of adequate storage space and other infrastructure following the purchase.
• This mismanagement often leads to the Wastage of food resources and threatened food security and a lack of buffer stocks.

ISSUES RELATED TO TRANSPORT AND MARKETING OF AGRICULTURAL PRODUCE

• Poor transportation facilities and road infrastructure cause delays in the transportation of agricultural products, leading to spoilage, loss of quality, and reduced profits.
• There are also issues in the marketing of agricultural products due to loopholes in Agricultural Produce Market Committee (APMC) system.

ISSUE IN MONETARY POLICY OF RBI

• The primary goal of the monetary policy of RBI is to maintain price stability.
• However, the RBI is not able to respond nimbly to growth headwinds and adverse movements in near-term inflation risks delaying the first cut.

GOVERNMENT MEASURES

PM AASHA

• Pradhan Mantri Annadata Aay SanraksHan Abhiyan (PM AASHA) is a scheme launched by the central government in 2018 to ensure fair prices for farmers and their produce.
• By strengthening the procurement process, the PM-AASHA scheme will improve the income of the farmers to a greater extent.

BUFFER STOCK RELEASE

• The concept of Buffer stock was introduced by the government to reserve a commodity that is used to offset price fluctuations and unforeseen emergencies.
• It is generally maintained for essential commodities and necessities like food grains, pulses etc.
• At present, the Government prefers to use the term  Food grain stocking norms, which refers to the level of stock in the Central Pool that is sufficient to meet the operational requirement of food grains and exigencies at any point in time.

GOVERNMENT PROCUREMENT

• The Food Corporation of India is a Central Government entity responsible for procuring food grains directly from the farmers and then distributing them through the PDS throughout India.
• The government’s procurement strategy for food grains has wide aims, including providing MSP to farmers and supplying food grains to the poorer sections at reasonable costs.

EXPORT BAN

• The concern about food inflation is evident in the pre-emptive steps the government is taking, such as banning some types of rice exports, imposing stocking limits on wheat, and market intervention to improve supplies.
• Between May 2020 and now, the government has banned the export of wheat and all non-parboiled non-basmati rice. India, despite being the largest exporter of rice and second largest of sugar, has imposed a ban on exports of broken rice and continues curbs on wheat and sugar to ensure its food security

CURB ON ARTIFICIAL HOARDING

• Artificial hoarding has led to recently seen high rise in tomato prices up to 200 per kg.
• The government has already announced policies to curb artificial hoarding as it is conscious of the impact of food inflation.
• The government imposed stock limits on wheat with immediate effect till March 2024 in a bid to check hoarding and contain rising prices.

PRICE STABLISATION FUND

• Price Stablisation Fund was established in 2014-15 to absorb extreme volatility in selected commodity prices.
• Such goods will be procured directly from farmers or farmers’ organisations at the farm gate/mandi, and made available to consumers at a more affordable price.

OPERATION GREENS

• Operation Greens seeks to stabilize the supply of Tomato, Onion and Potato (TOP) crops and to ensure availability of TOP crops throughout the country round the year without price volatility.
• It aims to enhance value realisation of TOP farmers by targeted interventions to strengthen TOP production clusters and their FPOs, and linking/connecting them with the market.

ESSENTIAL COMMODITIES ACT, 1955

• The Act empowers the central government to control the production, supply, distribution, trade, and commerce in certain commodities.
• It seeks to increase competition in the agriculture sector and enhance farmers’ income.
• It aims to liberalise the regulatory system while protecting the interests of consumers.

THE WAY FORWARD

• Reform in APMC: There is a need for reform in the existing system of APMC system with increased competition to avoid monopoly. Alternative marketing channels, such as direct selling, needed to be encouraged.
• Supply chain management: Investments must be made to bolster infrastructure for supply chains to enable a strong supply chain management system, which would be in sync with the current global scenario with advanced track and trace technologies.
• Fiscal Policy Interventions: Fiscal policy interventions via price stabilisation measures, such as the release of stocks, and facilitating imports, could be deployed to contain abnormal price spikes.
• E- technology in the aid of farmers: E-Technology has the potential to improve the livelihoods of farmers and improve decision-making at farmer levels by dissemination of relevant and timely information regarding agri- inputs, suitable farming techniques, etc. This can be done through platforms such as Kisan SMS Portal, Kisan Sabha App, etc
• Better Weather forecasts: A better mechanism to provide weather-based agro-advisories to farmers in a timely and efficient manner will be helpful. It can help limit the impact of erratic monsoons and the shadow of the El Nino weather phenomenon.
• Enough buffer stocks: To mitigate the risk of food inflation, the Government should ensure enough buffer stocks of essential food items such as wheat and rice. The option of importing to meet any supply-demand mismatch should be kept open.
• Crop Diversification: There is a need to shift from the regional dominance of one crop to regional production of a number of crops, to meet ever increasing demand of cereals, pulses, vegetables, fruits, oilseeds, fibres, fodder, grasses etc.
• Climate Resilient Agriculture: There is need for climate resilient agriculture which can include developing cultivars tolerant to heat and moisture stresses, modifying crop management practices, improving water management etc.
• Improved Price Monitoring: There is need of improved price monitoring to analyses the price situation and gives advance feedback for taking preventive measures to help policy interventions at the right time.

THE CONCLUSION: The RBI has recently said that the fight is far from over, and monetary policy has to stay the course to align inflation with the target in this last leg of a strenuous journey. Hence, a wider set of artificial factors, in addition to the monsoon’s progress, need to be taken into account to assess inflationary pressures in the economy.

MAINS QUESTIONS

Q.1 Discuss both natural and artificial causes and implications of food inflation and suggest suitable measures.

Q.2 Explain how Indian Monsoon is linked to general food prices in India. What are the measures being undertaken by the government of India to deal with food inflation?