Mounting pressure is palpable within Indian households as the costs of essential culinary components, including tomatoes, onions, potatoes, pulses, and spices, surge. These inflationary trends coincide with the approach of significant state elections later this year, followed closely by national elections. The growing expense of kitchen basics creates an allure for the ruling Bharatiya Janata Party (BJP), led by Prime Minister Narendra Modi, to embrace fiscal populism.
The escalation of food prices has driven the annual retail inflation rate to reach 7.44% in July, marking the highest level in 15 months. In response to these challenges, the government recently imposed a 40% export duty on onions, in addition to an existing ban on overseas sales of select rice varieties and the removal of import restrictions for purchasing tomatoes from neighboring Nepal. The erratic monsoon patterns further raise the specter of potential shortages.
During the summer cropping season, farmers are sowing up to 40% less than the usual quantities, with the situation potentially worsening due to record-low rainfall in August. Although a temporary spike in vegetable prices is typical during the monsoon period, followed by a gradual decline in September, the reduced cultivation of staple foods portends an extended period of elevated food costs.
The timing of these challenges is notably delicate, as elections are scheduled in five of India’s 28 states this year. Key constituencies such as Madhya Pradesh and Rajasthan are part of this electoral landscape. It’s worth remembering that inflated onion prices played a role in the BJP’s loss of power in state elections back in 1998. Even this year, during the Karnataka state election, competing political parties vied for voter attention by proposing various giveaways, including complimentary cooking fuel and cost-free bus rides for women.
As of now, New Delhi is striving to manage the situation within defined boundaries. A proposition is being considered to reallocate $12 billion from the government budget to amplify relief measures. These could encompass reductions in fuel taxes and import tariffs, as reported by Bloomberg last week. This approach underlines the government’s commitment to maintain the fiscal deficit target of 5.9% for the current year, as well as the broader objective to narrow it down to 4.5% by March 2026. However, challenges persist due to potential delays in asset divestment plans, such as those related to IDBI Bank (IDBI.NS).
The regime’s adherence to fiscal prudence has played a pivotal role in containing inflation since Narendra Modi assumed office in 2014. This commitment not only appeals to global investors but has also steered the government towards prioritizing capital investments over cash transfers to alleviate the economic burdens faced by households and businesses amid the pandemic. Notably, a free food initiative, covering around 57% of the population, was extended until December. Nonetheless, the strains of rising living costs could prompt both Modi and investors to venture outside their accustomed zones of comfort.