There is a degree of comfort within the corridors of the Reserve Bank of India (RBI) as the latest consumer price index (CPI) inflation figure, for April 2023, has slid to 4.7%, and food inflation is even lower, at 3.84%.
The RBI Governor, Shaktikanta Dasis hopeful that the overall GDP growth in FY24 will be between 6-6.5%. If the RBI is able to keep the overall inflation below 5% and GDP growth above 6% for the year, that will not only be commendable but would call for a bit of cheer. And it is quite doable, provided the RBI and the government of India (GoI) work in tandem to achieve the twin objectives of managing inflation and achieving high growth.
Also read: Making RBI fit for the future
Of course, the dream would be to have inflation down to 4% and GDP growth touching 7%, even if it is just for last quarter of FY24. This will bring rich political harvest to the current regime in the 2024 parliamentary elections.
The food and beverages component in the Indian CPI basket has a weight of 45.86%, the highest amongst G-20 countries. Managing to keep this component at around 4% is critical to tame overall inflation.
Interestingly, this component of inflation can not be managed only through monetary policy, nor even by fiscal policy. The simple reason is that it is often triggered by external shocks, such as droughts, breakdown of supply-chains (such as during Covid), or conflicts (such as the Russia-Ukraine war raging for more than a year now).
The looming danger is the possibility that the brewing El Nino would be strong enough to cause below normal rainfall, or even a drought. Remember that all droughts since 1947 have been El Nino years, but all El Nino years are not necessarily drought years.
There is often a tug of war between the El Nino and Indian Ocean Dipole, and we don’t know which way the clouds will swing. Although we have to wait for the Indian Meteorological Department (IMD) to give its revised forecast on the monsoon by the end of this month, the unseasonal rains in April-end and the first half of May do not augur very well for agriculture.
As old wisdom advises hoping for the best but preparing for the worst, it may be worth thinking about how best to keep food inflation below 4% in case the monsoon rainfall this year turns out to be below normal.
The biggest crop of the kharif season is rice. And rice inflation (non-PDS) for April was 11.4%. Inflation in the prices of wheat, the biggest rabi crop, is still very high, at 15.5%. The overall cereal and products inflation is still at the uncomfortably high level of 13.7%.
Also read: A little less lonely together
Three things need to be noted here. One, more than 800 million people are getting free rice and/or wheat (5 kg/person/month) under the PM-Garib Kalyan Yojana. So, they are well protected from cereal inflation.
Second, the rice stocks with the Food Corporation of India (FCI) are more than three times the buffer stock norms for rice. If the government wants to tame rice inflation, it can unload 5 million tonnes (mt) of rice from the Central Pool in open market operations, and easily bring down the rice inflation to around 4%. And the window to do that is from now till, say, September-October, just before the rice harvest season starts.
Third, the wheat procurement has been sufficient (touching 26 mt) to meet the public distribution system (PDS) requirements (around 22 MT) and still give some room for open market operations.
The basic point I am making is that to tame cereal inflation, we have to use buffer stocking policy more pro-actively. This would be much more effective than any monetary policy instrument.
However, there is concern about milk and milk products. Inflation for this segment in April was at 8.85%. But, since it has the highest weight amongst 299 commodities that comprise the CPI basket, its contribution to CPI inflation in April was almost 12%, the highest amongst all commodities.
Experts give two reasons behind this inflation. One, lumpy skin disease took its toll and as a result the milk production growth rate collapsed to almost zero in FY23 from a normal growth rate of 5-6% it achieves in a normal year.
Second, fodder price inflation has been very high, hovering between 20-30% in recent months. Both these factors have been straining milk prices, which are not likely to come down this fiscal in a the business-as-usual scenario.
The policy instrument to use is to lower import duties on fat—currently at 40%—and on skimmed milk powder (SMP), for which, it is 60%. Indian prices of SMP and fat (butter) are much higher than the global prices, and, therefore, reducing import duties to, say, 10-15% would push up import of fat and SMP to a certain degree. That could help in reining milk and milk products prices.
The bottom line is that we need to focus on cereal and milk inflation, both of which have high weights in CPI. The policy instruments to keep their inflation around 4% are buffer stocking policy (unloading excess stocks in open market operations) and import policy (reducing import duties).
These policy actions have to be pre-emptive in nature and not reactive to the event. Our research in this area shows that there is a lag of 2-3 months for these policy actions to show their results.
As one can note, the unloading of about 3.4 mt of wheat during January to March brought down the wholesale prices of wheat, which enabled procurement of 26-plus mt. But the retail price inflation of wheat is sticky, and still in double digits. In case of milk, policy makers are already late. But as the old saying goes, it is better to be late than never!
The writer is distinguished professor at ICRIER
Views are personal
#Reining #food #inflation #Financial #Express
