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Resource centre on India's rural distress
 
 

Record foodgrain estimate won’t lead to lower prices-Ruchira Singh

Rice, wheat production seen at highest ever, but other commodities show a decline from previous year’s harvest

The government estimated a record high foodgrain crop for the 2011-12 crop year that ends in June, driven mainly by higher output of rice and wheat, but experts said prices are likely to remain firm and keep inflation at around 7%.

The likelihood that the government will increase the minimum prices it guarantees farmers for foodcrops it procures from them and rising prices of imported edible oils and pulses will keep the pressure up on food prices, said two economists and a top executive in a food company.

“Here the volume-to-price relation that we see in a normal market context won’t be there as the government is bound to raise the MSP (minimum support price) of crops,” said Abheek Barua, chief economist, HDFC Bank Ltd. “Food inflation may continue to stay at current levels; perhaps it may get lowered slightly in the first half of the current fiscal year.”

Foodgrain production during 2011-12 is estimated at 252.56 million tonnes (mt), an all-time high for India, compared with 244.78 mt in the previous year, according to the government’s latest data.

Total production of rice is estimated at 103.41 mt and wheat production is estimated at 90.23 mt, both of which are the highest figures ever for the country, where about 40% of the population is poor.

A combination of factors have been helping the two key staple crops, including a thrust on “green revolution” in east India, higher MSP year-on-year, and a state procurement mechanism that serves to encourage farmers of wheat and rice.

The government’s data also shows a record high estimate for urad at 1.81 mt and for cotton at 35.2 million bales of 170kg each.

The bad news comes from other commodities, with coarse cereals and oilseeds and total pulses showing a dip from the previous year’s harvest, indicating that imports of edible oil and pulses will remain high.

“If you compare the numbers with last year, the picture is actually grim,” said Madan Sabnavis, chief economist, CARE Ratings. “Foodgrains have been highlighted, but pulses and oilseeds are lower and both are import-dependent. So the impact on prices will not be that good.”

Earlier this week, India reported annual Wholesale Price Index inflation for March at 6.89%, mainly driven by higher food prices, exceeding forecasts, a Reuters report shows.

Barua estimated headline inflation at 6.2% by September and at about 7% by March 2013. Sabnavis said his inflation outlook remained stable at 6-7% for most of the year, provided India has a normal monsoon. On 5 April, Mint reported that monsoon rain is likely to be normal this year.

“There are other factors which affect prices, such as MSP, logistics shortage, etc., which override the conventional relation between output and prices,” Sabnavis said.

The food company executive, who did not want to be named, said depreciation of the rupee against the dollar and the likelihood of a lower global production of oilseeds will keep India’s import bill high. “Palm oil is in a low production cycle, and in South Africa there has been a lower soybean production,” said the executive. “The new soybean crop in the US will be planted in May-June and harvested in September. If all goes well, this could help shore up the oilseeds production.”

India is a major importer of palm oil from Malaysia and Indonesia, and soybean oil from South Africa.

HDFC’s Barua said another reason why the record high foodgrain output will not help lower inflation much is the fact that food inflation has been stoked by non-cereal food items.

“There has been episodic increases in vegetable prices and a secular rise has been seen in protein-based foods such as fish and eggs. Unless India addresses these two issues, it will see elevated food inflation.”