Despite two successive record seasonal harvests, food inflation in India remains stubbornly high, prompting the government to announce this week that it will be soon importing certain vegetables.
While the inflation rate is expected to ease in coming weeks, prices are unlikely to fall drastically any time soon.
Retail inflation rose to 7.3% in September — the highest since February — driven mainly by prices of food items, in particular that of vegetables.
The price hike came in the wake of transport disruptions due to Covid-19 related lockdown that stalled movement of many fruits and vegetables from their centres of production. An extended spell of monsoon rains also affected production of vegetables with high moisture content damaging onions in storage in particular.
The monsoon season usually withdraws from over the Indian subcontinent by mid-September, but this year the seasonal rains lasted till the first week of October in parts of the country. .
The central government recently relaxed norms for imports of onions as well as decided to import as much as 1 million tons of potatoes by January 31, 2021, to cool down prices. Though the imports are expected to have a salutary effect on prices, the arrival of the winter season crop is expected to have a bigger impact.
“Generally between November and February, food prices tend to come down due to less wastage during the winter season. There are also a lot of new crops that come during this period,,” said Sujan Hajra, chief economist at Anand Rathi Securities.
“There is a significant possibility that prices will come down.”
Hajra said that the imports will only help to cool down prices on the margins. India produces around 300 million tons of fruits and vegetables annually and currently is a net importer.
Winter harvest to lower prices
Expectations that crude oil prices could come down won’t help much either as the central government has not fully passed on the benefit of lower oil prices to retail consumers.. Otherwise that could have helped bring prices down as bulk of the food items are transported by road through trucks that use diesel.
However, prices of items like pulses and vegetables are likely to come down due to the winter season harvest. India is also expected to reap a record rice crop, which could help sustain a government program to provide upto five kilograms of free foodgrains to the poor that it launched following the pandemic.
“In recent months, retail inflation has surprised on this higher side and in the next six months, retail inflation may surprise us on the downside. The Reserve Bank of India said it could fall to 4.5%, but I believe it can go to 4%,” Hajra said.
In a bid to revive consumption-led growth, the Reserve Bank of India has pledged to follow an accommodative monetary policy — easier loans and advances. Greater money supply is one of the reasons for the high inflation rate.
Industrial supply of goods is expected to outpace demand for at least the next 18 months. Economists say it could take upto two years for a revival of demand back to pre-covid levels.
Madan Sabnavis, chief economist at CARE Ratings, said that while he did expect the inflation rate to come down, he did not expect a drastic fall in prices. “With the kharif crop (winter) harvest, there should have been relief already.”
He noted that the winter crop usually starts arriving in markets from October, but so far prices remained extremely high. Onion prices–which is often taken as a bellwether of vegetable prices in India–have risen to Rs 100/kilogram in parts of India.
Even prices of vegetables like cauliflowers have risen to around the same level–more than double the levels prior to the pandemic.
“It is the logistics and shortages which has created the problem. It is a supply side problem. Vegetable prices have been really horrendous for the past one month,” Sabnavis said.
Since vegetables have short maturation cycles of two to three months, domestic supplies are expected to improve over the next month or so. Bountiful monsoon rains have filled up the water reservoirs which will help the production of vegetables as well as other crops.