Controlling inflation will depend on monsoon, vegetable prices

In July, monsoon rains were almost 13% more than normal across India. In the entire monsoon season between June 1 and August 7, rainfall across India has been 2% above normal

Food prices have increased in the past few weeks, mainly due to tomatoes and other vegetables. Wheat, rice, edible oils and even some common spices have become expensive too.

The central government first imposed stock limits on pulses (arhar and urad) and then on wheat to tame prices. It then banned the export of non-basmati rice, allowed tomatoes to be imported from Bhutan, sold tomatoes through state agencies, extended the period of imported pulses, and banned exports of rice bran oil cake.

Some of these measures were on expected lines and others draconian, according to traders. With five state elections this year and the Lok Sabha contest in 2024, policy makers say combating inflation will be top on the government’s agenda and it could take harsher measures. Inflation control will depend on the trajectory of the southwest monsoon followed by the winter rains.

In July, monsoon rains were almost 13 per cent more than normal across India. In the entire monsoon season between June 1 and August 7, rainfall across India has been 2 per cent above normal.

The rains have been 22 per cent above normal in northwest India and in the east and northeast it has been deficient by the same amount.

The skewed distribution has meant that kharif crops have been damaged due to excessive rains in some parts of the country and in other places they are facing water scarcity. The India Meteorological Department (IMD) has predicted below normal rains in August and September, a month when the monsoon starts receding.

The price spike in vegetables is seasonal and should come down once supplies normalise, but wheat and rice are expensive because of global factors, low central government stocks and rising demand from the processing industry.

The production of wheat and rice last year was much lower than government estimates, according to trade and market sources.

Traders said actual wheat production was not more than 100-102 million tonnes while the government estimate is around 113 million tonnes. Rice production was less than the 130 million tonnes estimated by the government.

Pulses production in the crop year of 2022-23 (July to June) is projected to be around 27.5 million tonnes, slightly more than the same period last year, as per the third advance estimate about food grains released a month back.

According to this estimate, the production of both tur and urad is expected to be less than last year and that of moong and masur is projected to be more.

Tur or arhar production in 2022-23 of 3.43 million tonnes is estimated to be around 19 per cent less than the previous year. Urad production of 2.61 million tonnes is estimated to be almost 29 per cent less than last year.

Low production means that India’s reliance on international markets for the two pulses is growing at a time when global prices are not benign.

A report by CRISIL Research said that monsoon rains, after a weak start, have caught up well and improved sowing in the country.

Yet, significant risks are on the anvil since (1) the impact of El Niño is yet to play out, (2) extreme weather events are a growing unpredictable risk, and (3) global food prices remain vulnerable to trade restrictions, it warned.

“Even as the monsoon has turned normal this year, it is important to remember that food inflation was high in three of the past four years of normal monsoon. Extreme weather events, even if brief, can cause wild food price swings, especially for vegetables. Government policies and geopolitical developments are increasing their influence on domestic inflation in recent years,” said the CRISIL report.

A wider set of factors, in addition to the monsoon’s progress, need to be taken into account to assess inflationary pressures in the economy. The monsoon has been normal or above normal nationwide in the past four years and food grain production has improved but yet food inflation, as measured by CPI, remained above 6 per cent in three of these four years, it said.

Vegetable prices are the most volatile component of inflation and more affected than cereals by extreme weather events, local supply disruptions and wastage, said CRISIL.

Pulses inflation has been elevated in fiscal 2020 and 2021, but is less volatile and peaking at lower levels than before.

Also, it (pulses prices) are highly dependent on monsoon since only 23 per cent of its area is under irrigation in India.

“Other factors such as international commodity prices, domestic policies and the lagged impact of previous year’s production influence final inflation outcomes,” said CRISIL.

For instance, the sharp rise in international wheat and edible oil prices post the Russia-Ukraine conflict contributed to surging inflation last fiscal, it added.

A report by Bank of Baroda said the second half of this year might get some comfort in inflation as vegetable prices cool down. “For Jul’23 we expect CPI to settle ~5.8%. RBI in its coming policy would be continuing with its hawkish pause and might revise its inflation projection for Q2 upwards,” said the report.

"Vegetable inflation is one of the major drivers of food inflation in India, as vegetables account for about 15 per cent of the food basket. Vegetables are also highly perishable and seasonal, which makes them prone to price fluctuations due to changes in production and consumption patterns. Onion is one of the most widely consumed and traded vegetables in India, with an annual production of about 30 million tonnes and an annual domestic consumption of about 15 million tonnes," said Vicky Dodani, founder of Agrizy, an agriculture-based start up.

He said onion prices are influenced by various demand and supply factors, such as weather shocks, crop losses, storage issues, hoarding, exports, and consumer preferences.

One way to prevent the high and volatile onion prices is to adopt food processing techniques, such as dehydration. “Eight kg of raw onion, when processed, forms one kg of dehydrated onions. If the cost of raw onions during the peak season is Rs 4 per kg, procuring eight kgs of raw onions will cost Rs 32. And if the processing cost for the same quantity is Rs. 30, the total cost of dehydrated onions will go up to maximum Rs 65/kg, which is significantly lower than the price per kg for raw onions when inflation strikes,” said Dodani. Onions can be procured at a lower cost during peak season and stored for later use.