Tough Inflation control steps achieve intended goals, but at no small cost

While the steps have had the desired impact to some extent, experts have criticised them for burdening farmers and going against the concepts of open markets and 'atmanirbharta'

Alarmed by the spurt in inflation months before the crucial state assembly elections, the Central Government announced a series of measures this month to control prices of essential commodities largely in the areas of oilseeds and pulses.

The steps announced ranged from suspending futures trade in a host of agricultural commodities, to extending the deadline for free import of pulses and lowering the import duty on refined edible oils.

The measures, all taken in a span of day or two, had the desired impact to a certain extent and latest data shows that the retail prices of all major edible oil brands in the country have dropped by 10-15 per cent, while in case of pulses, trade sources said there hasn't beem much uptick in prices.

Inflation conundrum

In 2021, among other things, high food inflation was perhaps one of the most important problems that confronted policy makers, governments and the common man alike.

Just as the economy started showing signs of revival after the devastating second wave of Covid-19, inflation confronted the man on the streets in the form of high fuel and food prices.

Whether it was manufactured or processed commodities, transport and cooking fuel, vegetables, fruits, pulses and others, prices headed north, mainly due to the high cost of raw materials.

High input costs of many manufactured raw materials were passed on to end-users by producers, pushing the wholesale price-based inflation to an all-time high in November, while retail inflation too remained on a sticky wicket.

From a benign level of little over four per cent in January 2021, retail inflation breached the six per cent mark twice in mid-2021, before declining towards sub-5 per cent in November.

November retail inflation of 4.91 per cent was the highest in three months and more than the 4.48 per cent in the previous month, driven largely by rise in food inflation to 1.87 per cent from 0.85 per cent, despite the Centre and states reducing taxes on petrol and diesel

On the other hand, Wholesale Price Index (WPI)-based inflation hit a record high of 14.23 per cent in November as against 2.29 per cent in 2020 due to hardening of prices of mineral oils, basic metals, crude petroleum and natural gas. It was at 12.54 per cent in October.

WPI inflation remained in double digits for eight consecutive months beginning April.

Quick measures

Though the government has been taking a series of measures over the past one year, by repeatedly lowering import duties on edible oils (six times since February 2021) and also allowing free import of pulses along with a host of other steps to cool down inflation, the pace increased in December 2021.

On December 20, the Securities and Exchange Board of India (Sebi), under directions from the Ministry of Finance, barred exchanges from launching new futures contracts in paddy (non-basmati), wheat, chana, mustard seeds and its derivatives, soybean and its derivatives, crude palm oil and moong for a period of one year with immediate effect.

In perhaps one of the biggest crackdowns on commodity derivative futures since trading was opened in 2003, the regulator said no new contracts will be allowed on the seven commodities for a period of one year, while in respect of their running contracts, no new position will be allowed to be taken and only squaring off will be allowed.

Trade sources said in the case of paddy (non-basmati), wheat and moong, though there were products available on the exchanges, the volumes were very low and in the case of mustard seed and chana, taking fresh positions had already been suspended since August.

The maximum impact of the move is expected to be on the soybean complex and crude palm oil.

Till November, the combined average daily turnover of soyoil, soybeans, rapeseed and chickpeas on NCDEX was estimated to be about Rs 1,270 crore ($167 million), data showed, while crude palm oil clocked an average volume of Rs 200 crore daily on the Multi Commodity Exchange.

Not only that, days after the ban on futures the Centre lowered the basic customs duty on refined palm oil to 12.5 per cent from 17.5 per cent till March 2022.

It also allowed traders to import refined palm oil without license for one more year till December 2022.

After the reduction, the effective duty (that includes social welfare cess) on both refined palm oil and refined palm olein will come down to 13.75 per cent from 19.25 per cent.

Palm oil, both in its crude and refined form, comprised more than 60 per cent of India’s total edible oil import of about 13.1 million tonnes in 2020-21 (Nov-Oct).

In pulses, the Centre extended the deadline for free imports of moong, tur and urad till March 31, 2022. For tur and urad the cargo should arrive in India before June 30, 2022.

For moong, the deadline for free imports ended on October 31, 2021, while for tur and urad it ended on December 30, 2021.

Stock-holding limits were also imposed on soymeal in a bid to control prices.

In a circular, the department of consumer affairs, food and public distribution said soymeal millers, processors or plants can hold stocks only up to 90 days of production.

Traders and trading companies can hold only up to 160 tonnes of soymeal with a defined and declared storage location. The stock holding limits will be in place till June 30, 2022, according to the official circular. Traders have also been directed to declare and update all their soymeal stocks in a prescribed format for regular monitoring.

Imposing stock limits was also unprecedented as soymeal is not an essential commodity. But, the Centre amended the Essential Commodities Act of 1955 to include soymeal into the category.

"The decision would empower the Central Government and all states and UTs to regulate production and distribution of soymeal and to smoothen its sale and availability in the market. It will stop unfair market practices and enhance the availability for consumers like poultry farms and cattle feed manufacturers," the Centre said in a statement.

Soymeal is derived from crushing soybeans and is the main ingredient of poultry feed meal. India’s soymeal is also in high demand in the world markets because it is produced from non-genetically modified sources.

Soymeal rates have jumped sharply in the domestic market due to strong demand from the overseas markets and rise in soybeans rates.

Clearly, with crucial assembly elections round the corner, the Centre seems not to take any change as far as inflation is concerned.

The criticism

Some of the measures announced by the government in the recent past to control inflation go against the very concept of open markets and ‘atmanirbharta’ (self-sufficiency) that this government and also its official think tank NITI Aayog has been championing for long.

Several market players said that the suspension of futures trade in seven major commodities in one go is unprecedented and the last time such a drastic measure was taken was in 2012 when the UPA government was in power.

Commentators are saying that suspending the futures trade in some items like wheat and non-basmati paddy for one full year is unreasonable given that their prices have hardly risen in the last one year. In the exchanges too, the commodities attracted very little volumes.

On lowering import duty on refined edible oils, Atul Chaturvedi, President of Solvent Extractors Association of India said that the reduction in import duties and also allowing free imports till December 2022 is contrary to the principle of Aatma-nirbharta and may harm employment generation and value addition within India.

In case of pulses, Rahul Chauhan, Director of iGrain India, a commodity advisory firm said that the decision to extend the deadline for free imports might have gladdened the hearts of Indian importers and foreign producers, but it has increased the concern of domestic farmers.

“Farmers are apprehensive of a significant fall in the domestic market price of pulses,” Chauhan said in a note. He said producer organisations want the government to reconsider its decision of allowing free imports and want it to be included again in the purview of the annual quota system.

The future trajectory

If the year 2021 was the year of high inflation, all eyes are now on 2022 to see how prices will move in the coming times.

A PTI report filed a few days back said that while analysts and experts feel that high inflation on an absolute basis is here to stay, a gradual pick-up in the economic growth and good crop prospects due to normal monsoon will help soothe the prices going forward.

IN the rabi season, according to traders, production of oilseeds is expected to be around 11 million tonnes up from 8.5 million tonnes this year, while pulses production is also expected to be around 12 million tonnes, same as last year in the rabi season.

"We expect that with normalisation of growth, commodity prices are likely to cool and this will be beneficial for India inflation. Global food prices are high but this may not have a direct impact on India as India has adequate buffer stock of grains," PTI quoted Indranil Pan, Chief Economist at Yes Bank as saying.

According to Pan, the current inflation trends indicate some permanency.

"Fuel inflation may ease, even as the absolute costs remain quite high across various products, eating into households' disposable incomes," Aditi Nayar, Chief Economist at Icra said as per the PTI report. 

It also quoted Madhavi Arora, Lead Economist at Emkay Global Financial Services as saying that they see FY22 inflation at 5.5 per cent (RBI: 5.3 per cent) with risk largely balanced. Even with food inflation averaging around reasonable levels, core inflation will average nearly 6.2 per cent, outdoing headline.