CPI Inflation: Are Government’s Interventions Working?
While government measures have helped rein in prices of edible oils, any relief in cereal prices is still impending.
The government has intervened to bring down inflation pressures in some agricultural commodities and prevent shortages because of supply-side disruptions. While its measures, along with easing global prices, have helped rein in prices of edible oils, any relief in cereal is still impending.
What Government Has Acted On
Cereal inflation rose to 11.5% in September, the highest since at least 2014, led by wheat/atta and rice.
Inflation in rice rose to 9.2%, while prices of atta rose 17.4%. Wheat supplies came under pressure from the impact of a heat wave, while lower sowing of rice and delayed monsoon withdrawal are exacerbating pricing pressures on rice.
Restrictions on wheat exports were imposed since May, and exports of wheat flour were banned from Aug. 27. Also, effective Sept. 9, the central government imposed a ban on broken rice exports and imposed a 20% export duty on non-basmati rice, barring par-boiled rice.
The government has reduced import duties and cess on pulses, along with rationalisation of tariff, imposition of stock limits on edible oils and oilseeds, buffer stock maintenance of onion and pulses.
Some Success, But More Needed
Sequentially, prices of rice and atta continued to rise, while refined oils fell.
Rice prices rose 2.2% in September compared to a rise of 2.3% in the previous month.
Price of atta rose 2.2% in September compared to a rise of 3.4% last month.
Edible oil prices fell 3.55% in September, marking the fourth straight month of a sequential decline.
Significant moderation has been observed in inflation in edible oil and pulses, said Suman Chowdhury, chief analytical officer at Acuite Ratings & Research.
Edible oil prices had been ruling at very high levels over the last two years and reached a peak in May before dropping 6.8% from those levels by September. While the improvement in supply chain and the drop in international prices of edible oils have played a role, the government’s efforts through lower import duties and persuading the domestic refiners to pass on the lower costs to the consumer have also been a key factor in price moderation, Chowdhury said.
The prices of pulses, which had also seen a sharp rise last year, has only seen an inflation of 3% annually in September due to lower duties and higher imports of pulses in the previous fiscal as well as imposition of stock limits in July on a short-term basis under the Essential Commodities Act, he said.
According to Abhishek Upadhyay, economist at ICICI Securities, key pressure point in food inflation is cereals, and the objective of the government policy in that sector is not clear. The export curbs announced for rice and wheat are after a reasonable delay.
Also, the free foodgrain distribution scheme has been extended again. While that may have some impact in managing the ‘K-shaped’ economic recovery, it still keeps demand high at a time there are worries about weak harvest for paddy, Upadhyay said. Cereals have a large weight in CPI and past experience also indicates high risk of spillover to other food segments.
The government’s steps to soften the domestic prices of cereals like wheat and rice, Chowdhury said, is yet to work on cereal inflation. Grain prices, however, are likely to moderate once the Kharif harvest comes to the market and provided there are no negative surprises vis-a-vis the advanced estimates of the food ministry, he said.
Goldman Sachs said upside risks to food inflation emanate mainly from cereals due to supply shortages and vegetables amid reports of excessive rains affecting harvests in certain parts of the country.
High frequency data till Oct. 12 is tracking 0.7% month-on-month increase in food prices as a sequential increase in vegetables, cereals and milk is likely to be offset by a fall in edible oil prices, it said in an Oct. 13 research note. Goldman Sachs forecasts food inflation to be at 6.8% annually, and headline inflation at 6.7%.
A delayed withdrawal of monsoon and uncharacteristically heavy rains in October are threatening to damage crops ahead of the harvest season. Vegetable prices have begun to rise and early estimates suggest that rice production could be 6% below last year. All of this could stoke inflation expectations at a time India’s inflation is well above the central bank’s target range, already grappling with shocks such as high and volatile oil prices.