A surge in the prices of essential food items in India, driven by irregular and insufficient rainfall, has compelled the government to take a series of measures aimed at enhancing supplies and alleviating inflationary pressures.
Amidst a backdrop of annual retail inflation reaching a 15-month peak at 7.44% in July, food price inflation has surged to 11.5%, marking its highest level in over 3 1/2 years. This situation has prompted Prime Minister Narendra Modi’s administration to take swift action to preempt any potential backlash from voters in upcoming state and national elections.
In a bid to ease the financial burden on low-income consumers, the government is contemplating an extension of a free food program scheduled to conclude in December. This strategy is being deliberated behind the scenes by government insiders, who declined to be identified due to media protocol.
Projected food subsidies are estimated to incur a cost of 1.97 trillion Indian rupees ($23.83 billion) in the fiscal year 2023/24. An expansion of the free food initiative could lead to an escalation in this expenditure.
Efforts have been intensified by the government to distribute subsidized vegetables, with a focus on onions and tomatoes, through its distribution network. Additionally, the government has released reserves of wheat and sugar into the market to temper escalating prices.
According to insider sources, these measures could collectively result in a government expenditure exceeding $12 billion.
Furthermore, the government is poised to impose a ban on sugar exports, a move not witnessed in the past seven years. This follows the earlier decision to halt the export of crucial rice varieties. Reports from Reuters indicate that the government is also contemplating the import of wheat, a measure not taken for years.
Insiders report that the government’s primary concern centers on cereals and pulses, which hold the largest share within the consumer food basket. An additional anonymous government source confirmed this perspective, emphasizing that while the government will steer clear of knee-jerk reactions, it remains committed to proactive efforts in managing inflation.
Efforts to obtain comments from both the Finance Ministry and the Prime Minister’s Office went unanswered.
Gaura Sen Gupta, an economist at IDFC First Bank Economic Research, noted that despite August witnessing a decline in the month-on-month momentum of food prices, thanks in part to governmental interventions, the impact of weak rainfall remains a source of uncertainty.
After experiencing above-average rainfall in July, the subsequent three weeks of August have been unusually dry. This has taken a toll on the prices of essential kitchen commodities such as cereals, vegetables, sugar, spices, meat, and dairy products.
Harish Galipelli, director of trading firm ILA Commodities India Pvt Ltd, highlighted the adverse impact on crops, stating, “Crops are not receiving the necessary rainfall when they need it the most.”
Prices of tomatoes have soared to unprecedented levels, prompting households to cut back and even leading fast-food chains such as McDonald’s and Subway to temporarily remove them from their menus.
Farm worker Mohammad Siraj, supporting a family of eight on a daily wage of 250 rupees ($3.03), lamented the situation: “It has been two months since I bought tomatoes, and we do not eat pulses regularly nowadays. Many times, we just eat rotis and salt for dinner.”
Erratic rainfall has significantly affected India’s rice crop, with submergence in northern states in July followed by a dry spell endangering yields in southern and eastern states, according to exporters.
Nitin Kalantri, a pulses trader, anticipates that pulse prices could remain elevated for more than a year due to the drought’s impact on yield potential.
While India is attempting to augment pulse supplies through imports, there is limited surplus availability from exporting nations such as Australia, Mozambique, Myanmar, and Tanzania.
Looking ahead, sugar prices are expected to increase in response to heightened demand during upcoming religious festivals. Longer-term, uncertainties loom regarding supplies for the subsequent season, as affirmed by Ashok Jain, president of the Bombay Sugar Merchants Association.
The outlook for both summer and winter crops is clouded by heightened uncertainty, given a 95% likelihood of El Niño conditions prevailing from December 2023 to February 2024. Aside from reduced rainfall, El Niño also leads to elevated temperatures.
“A winter heatwave could instigate a second wave of price surges,” warned a Mumbai-based dealer affiliated with a global trade entity.