June 15, 2012

 

India approves summer crops' purchase prices sweeping hike

 

 

As it would further boost persistently high food inflation in the coming months, a sweeping hike in the purchase prices of key summer-sown crops including rice, oilseeds and a pulse has been approved by India's federal cabinet Thursday (June 14).

 

It approved a 15.7% hike in the purchase price for rice, the main summer-sown staple crop, to a minimum INR1,250 (US$22) per 100 kilogrammes for the crop year starting July 1.

 

The government has also decided to impose an additional charge of INR100 (US$1.8) per 100 kilogrammes on rice when procuring the grain during its harvest in September-October.

 

It also increased the purchase price of the two main summer-sown oilseeds - soy  and groundnut--by 33% and 37% respectively, Home Minister P. Chidambaram told reporters. The price of corn was raised by 20%.

 

Although the government didn't give any reason for the price hikes, farm ministry officials said they would help farmers cope with rising input costs of seeds, fertilisers and electricity.

 

They also said a hike in purchase prices would encourage farmers to sow more rice and other staples rather than other crops, preventing any food shortages. India is aiming to produce a bumper food grain harvest for a third year in a row.

 

An economist said the decision would hurt consumers, even if the country produces more grains and other staples.

 

"In terms of food inflation, there will be an upward thrust across the board. There will be little respite," Madan Sabnavis, chief economist at CARE Ratings, told Dow Jones Newswires.

 

"A rise in minimum support prices [purchase prices] is one of the single most important factors that have led to a rise in [retail] food prices, notwithstanding the very good harvest that we've had in the last few years," he said.

 

Food inflation has been in double digits for around a year and has been contributing significantly to overall inflation. High food prices have been a headache for policymakers and the central bank as they seek ways to stimulate India's slowing economy through cuts in lending rates. The wholesale price index rose 7.55% on year in May, compared with April's 7.23% increase, government data showed.

 

India's food ministry had opposed any hike in purchase prices to avoid pushing up food inflation as well as avoid compounding grain storage woes. Farmers are likely to plant more rice this summer because of the purchase price hike and that would compound storage pressures.

 

Government warehouses are overflowing as a result of bumper crops over the past three years, with stockpiles exceeding storage capacity by around 20 million tonnes, leaving much of the excess supply in the open, where it's vulnerable to spoilage.