This is how New Delhi ruins a good monsoon to create food inflation

Abundant rains show little correlation to food prices that are more likely to be decided by politicians.

India has been blessed with its first good monsoon in years but still may be looking at a jump in food prices thanks to inflationary policies.

Abundant rains lead to bumper crops which lead to lower food prices, goes the traditional thinking but that is not how the Indian economy works anymore.

Food prices show little correlation to the June-through-September rains and are much more likely be determined by politicians and bureaucrats meddling with the market.

And this week they are starting to meddle.

India received 97% of its average long-term rainfall this monsoon, making it the first normal monsoon in three years. The last two years have been marked by drought. Optimists expect the regular rains to cool inflation but that is unlikely to happen, said R. Sivakumar, head of fixed income at Axis Mutual Fund.

Historically, even when rains were plentiful—for example during 1996 to 1998– India experienced high inflation. Meanwhile, during weak monsoon years, including the 2002 drought, inflation remained largely in check.

So if not rains, what is driving food prices in India?

One explanation is that food prices are determined more by the minimum support prices that the government sets for certain crucial commodities. New Delhi dictates higher prices, hoping to help farmers and win votes, consumers have to pay more for their food and inflation accelerates.

“High and low food inflation has depended more on political choices rather than the fate of rains,” Mr. Sivakumar said.

This year, India is expected to raise the minimum price it pays to farmers for buying lentils by about 14%, an official at India’s agriculture ministry said Thursday. The Commission for Agricultural Costs and Prices, a state-run agency, has recommended raising the purchase price of wheat by 7%. These proposals may be discussed by India’s cabinet next week.

The expected increase in government-controlled prices “will likely have an impact on food inflation,” and could push food inflation up around a percentage point higher than it would have been to 5% in the next five months Mr. Sivakumar said.

Food inflation in September was 3.9%.

Source: The Wall Street Journal