May 17, 2012

 

India's war against inflation heading to higher crop prices threat

 

 

As the government is expected to sharply increase the prices it guarantees for summer-sown staples, India's battle against inflation is likely heading for a serious setback making imported edible oils and pulses costlier due to declining rupee.

 

A panel that advises the government on crop prices has recommended raising the price of rice, the main summer-season crop, by 15.7% to a minimum of INR1,250 (US$23) per 100 kilogrammes in the crop year starting July 1. It has also recommended increasing the price of pulses by 25-30%, soy by 33% and groundnut by 37%.

 

The government usually accepts the recommendations. The cabinet will likely consider the proposals end-May or early June, around the onset of the monsoon rains to encourage greater sowing of the staples.

 

Officials say the government needs to encourage farming as it can't take the risk of the country slipping into a deficit before it launches an ambitious programme, likely later this year, to provide cheap food grains to a majority of the country's more than 1.2 billion people.

 

"We need to give higher price to farmers as input costs, be it of seed, fertiliser, power or labour, have gone up substantially," Farm Secretary P.K. Basu told Dow Jones Newswires.

 

This is bad news for the authorities fighting to contain inflation, one of the most vexing economic challenges for policymakers. Prices rose at a faster-than-expected pace of 7.23% in April, making things difficult for the central bank that had in recent months shown some hold on prices that remained stubbornly high for more than two years. Higher food prices can exacerbate its troubles as food articles have a nearly 15% weight in the wholesale price index, India's primary inflation gauge.

 

Sujon Hajra, chief economist at Anand Rathi Securities, said India has been raising the guaranteed crop prices by 11-12% in each of the past five-six years. "That is playing a major role in high consumer prices."

 

India's focus for increasing the output of staple grains is also affecting the availability of other crops. Over the years, the cultivation pattern has moved in favour of wheat and rice because of higher purchase prices for these crops, analysts said.

 

Because of this, the government is struggling to store surplus grain in its bulging warehouses, while imports of pulses and edible oils have been rising as domestic supplies have failed to keep pace with demand.

 

India imports about half of the 16 million tonnes of edible oils it consumers every year and depends overseas supplies for 15% the 21 million tonnes of pulses it requires annually.

 

Those imports are beginning to hurt because of a weaker local currency, which fell to an all-time low of INR54.46 against the dollar Wednesday (May 16). The rupee is down more than 2% so far this year after sliding 16% in 2011, making imported articles costlier for local consumers.

 

"Imports of vegetable oils have become 8-10% costlier due to the depreciation of the rupee," said B.V Mehta, executive director of the Solvent Extractors Association of India.

 

Farm Minister Sharad Pawar told parliament Wednesday the government is focusing on improving the cultivation of pulses and oilseeds over the last one year, but analysts said there is still a long way to go.

 

Besides staples, prices of other crops such as soy and corns--two feed ingredients for the dairy and poultry sector--have shot up and are likely to translate to higher prices of dairy items, poultry and meat.