Pulses and cereals are key worries in inflation

The latest bout of retail inflation was caused by vegetables, but prices of these items are not as worrisome as those of pulses

The latest bout of Consumer Price Index (CPI)-based inflation was caused by vegetables, but prices of these items are not as worrisome as those of pulses, which saw a slight moderation in June. Besides, inflation in cereals has been rising modestly, but if not checked this could lead to serious problems.

Also, there was a divergence between the rise in inflation in urban areas and a decline in rural areas in June, which economists attributed to the disruption in transport due to rain. However, the rural areas have been bearing the brunt of higher inflation: it was 6.20 per cent in rural areas in June against 5.25 per cent in urban areas.

Latest estimates of the CPI released by the Central Statistical Office show retail inflation rose to a 22-month high of 5.77 per cent in June on soaring food prices. The consumer food price index rose to 7.79 per cent in June, up from 7.47 per cent in May. By comparison, food inflation was 5.48 per cent in June last year. The CPI is now marginally below the upper band of the Reserve Bank of India’s (RBI’s) inflation target of 6 per cent. This hardening of food inflation is largely a consequence of soaring prices of vegetables and pulses. However, while inflation in vegetables has been increasing in recent times, it has been decreasing in pulses. Even then, inflation in pulses was at 27 per cent in June. (See chart).

But of the two drivers of food inflation, economists are less worried about rising vegetable prices and more concerned about rising prices of pulses.

“Prices of vegetables tend to be extremely volatile, with spikes in some periods followed by sharp dips after harvest, given the lack of adequate storage for these perishable items. The vegetable price rise we are seeing now would subside , with an easing of the temperature, before declining further if there is a good harvest with limited incidence of disease or pest attacks,” said Aditi Nayar, chief economist, ICRA. Pronab Sen, former chairman of the National Statistical Commission, said, “Vegetable prices are likely to come down over the coming months.” Vegetables typically follow a three-month crop cycle, and with a better monsoon season in the offing, the next vegetable crop should be large. Experts contend that vegetable inflation could come down around August when the new crop arrives in the market. By comparison, the outlook for pulses is worrying. “The hardening in prices of vegetables is less ominous than the structural demand-supply mismatch for pulses. The gap between domestic production and demand is difficult to meet through imports, given that pulses are cultivated in a few countries,” Nayar said.

“The mismatch between supply and demand leads to a large import dependence. This is worrying,” added Devendra Pant, chief economist at Ind-Ra. And, while the government is looking to imports to bridge the gap between supply and demand — it signed an agreement with Mozambique for pulses imports last week — the mismatch between production and demand is likely to persist. “I’m more concerned about cereal inflation,” he said. Cereal inflation rose to 3.1 per cent in June this year, its highest level since January 2015. If this situation is not checked, rising cereal inflation could lead to a repeat of the runaway inflation seen in 2013, according to Pant.

The other perplexing issue that the recent data has thrown up is food inflation in urban areas rose in June compared to May, while it declined in rural areas. Even then, rural areas saw higher inflation than urban areas.

Typically, rural food inflation outstrips urban food inflation, but in June ,food inflation dipped marginally to 7.61 per cent in rural areas from 7.67 per cent in the previous month, while in urban areas it rose to 8.16 per cent from 7.24 per cent. “The differences in inflation rates we see are tied to the same factors that are creating the gap between the CPI and the wholesale price index (WPI). In most products we have a big component of transport and trade margins,” said Sen. It is possible that this explanation, coupled with a disruption in transport due to rain, could have pushed up food inflation in urban areas.

However, inflation in rural areas was still higher than in urban areas. CPI inflation in urban areas rose to 5.26 per cent in June from 4.89 per cent in May, while it declined to 6.20 per cent from 6.45 per cent during this period in rural areas.

From a longer term perspective as well, inflation in urban areas has been higher than in rural parts. According to a CRISIL study, in the 24 months to June 2016, while urban inflation fell from nine per cent  to 5.3 per cent, rural inflation declined from 10.1 per cent to 6.2 per cent. Also, in 2015-16, rural core inflation was 6.7 per cent compared with 4.8 per cent in urban areas. And fuel inflation in rural areas was 6.8 per cent, more than two-and-a-half times the 2.7 per cent in urban areas. CRISIL attributed this to surging prices of cooking fuel like dung cake, firewood and chips.

While many are hopeful that a good monsoon will ease food supplies and dampen inflation, Pant said the government policy of grain management was critical at this juncture. Though decisions like the Maharashtra government’s move to delist fruits and vegetables from the purview of the Agriculture Produce Market Committees  could help ease price pressures in the future, their success will depend largely on how much produce farmers are actually able to sell in other markets.

With inflation likely to hover around its current level, this limits the room the RBI has to lower interest rates in its third bi-monthly monetary policy review in August.