April 20, 2012

 

India's grain production forecasts hits all-time high

 

 

Limiting the central bank's room to further cut rates and boost the economy, India raised its annual grain production estimate to an all-time high, but concerns over food-price inflation remain.

 

The central bank cut rates for the first time in three years this week amid slowing growth, but said it remains concerned about inflation, limiting the likelihood of further big rate cuts this year.

 

Two senior farm ministry officials Thursday (Apr 19) said India's grain output this crop year through June will likely rise to a record 252.56 million tonnes - a development which should put downward pressure on prices. They declined to be named because the government will officially release the figures Monday.

 

But the higher production is mitigated by a number of factors. India doesn't have adequate storage facilities for all its crops, meaning much of it will likely rot in the coming months. Another factor is the government pays farmers above-market prices, which keeps grain prices artificially high.

 

This programme, which is politically popular, will keep market prices from dropping until state agencies finish their purchases of the current wheat crop at end-June. Rates will fall a bit only when private traders try to get bargains for the remainder of the crop from July onwards.

 

Rising food prices, which account for around 14% of India's Wholesale Price Index, have been a major driver of inflation in India over the past two years, forcing the central bank to raise rates 13 times before Tuesday's cut. India's failure to get food prices under control despite record harvests in a key crop is a major reason that inflation remains a concern.

 

Wholesale inflation has slipped to below 7% in the past three months, from 9-10% about a year ago, but prices of food items remain high. Apart from grains, an Indian staple, prices for other food items such as eggs, meat and pulses also failed to fall.

 

"Food inflation will continue to exert pressure on general inflation, notwithstanding the fact that we have a very good harvest," said Madan Sabnavis, chief economist at CARE RATINGS. Others said high demand from consumers amid annual economic growth of around 7% kept prices high.

 

"Demand has increased much more than supply. We are the largest producer of milk in the world, but prices keep rising every other week," said D.H Pai Panandikar, an economist with private think-tank the RPG Foundation.

 

Inflation is driven by other factors, too. Massive government work guarantee programmes in rural areas have pumped money into rural economies while failing to improve agricultural efficiency, economists say.

 

The higher estimate for grains production was largely because of better-than-expected wheat production, with a prolonged weather chill in February and March improving yields. The government has revised estimates for wheat output to a little over 90 million tonnes from the previous estimate of 88.31 million tonnes, the farm ministry officials said.

 

The high crop estimate--coming after two successive record crop years--is likely to exacerbate the storage issues. State granaries can only hold up to 63 million tonnes, whereas the aim is to build up stocks of about 75 million tonnes by June 1. This means that between 8-10 million tonnes will lie in the open, vulnerable to rain and to rodents.

 

This led the government in September to lift a ban on rice and wheat exports that had been in place for three years. This year's record crop could lead to more exports of wheat and rice to avoid wastage.

 

Prices over the next six months could also depend on the annual monsoon, which has been plentiful for the past two years. Weather officials say early indications are that the monsoon will arrive on time--by end-May or early June--but added that it's too early to predict the quantity of rain.