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Published on: Aug. 26, 2020, 5:37 p.m.
Inflation worries
  • CPI crosses the Lakshman rekha

By Rakesh Joshi. Executive Editor, Business India

The Union finance ministry is said to be keenly monitoring the spurt in vegetable prices, especially of tomatoes and potatoes, as this has raised questions not only on the Reserve Bank of India’s (RBI) headroom for further interest rate cuts, but even for continuing with its accommodative monetary policy stance to revive growth and investment in the economy. The lockdown imposed in several cities, coupled with unfavourable weather and rising fuel prices, has affected vegetable supply, leading to a steep rise in prices.

The worry in North Block stems from the fact consumer price inflation, at 6.09 per cent in June, has already crossed the central bank’s 6 per cent Lakshman rekha. Food inflation of 7.87 per cent and core inflation increased for the fourth consecutive month to 5.1 per cent in June. Besides, the pass-through effects of the Rs11-12/litre increase in diesel prices since last month are still to be felt. A weekly report by Rabobank estimates that inflation could surge to an average of 12 per cent in 2021 if the RBI was to finance a second stimulus package of an amount similar to what was announced in the first spending plan earlier this year. The rupee could plunge substantially against the dollar from 2020 levels.

Vegetables turning dearer can significantly influence household inflation expectations that are also a key metric factored in by the RBI’s monetary policy committee. In its last 22 May meeting, the committee had taken note of the “unusual spike in food inflation in April,” which it expected to “moderate” on the back of a normal monsoon. That hasn’t happened.

Retail potato prices going up, from roughly Rs20 to Rs30 per kg in the last three months, shouldn’t have come as a surprise to the finance ministry if it had been acting in tandem with the agriculture ministry. The main rabi crop, which farmers harvest in January-March and mainly keep in cold stores for making staggered sales till October-November, has been an estimated 25 per cent lower this time. The reason for this is poor price realisations for the last three seasons (2016-17 to 2018-19), leading farmers to sow less in 2019-20.

Actually, given the production shortfall, the current prices are reasonable. The potato story is similar to onions last year. Then, too, it was the price crash from a bumper 2017-18 crop that made farmers reduce plantings the following year. Aloo prices would have gone the pyaaz way, but for the lockdown-induced shutdown of eateries and dip in consumption of potato-based snacks. More than potatoes, the rise in tomato prices – from Rs20 to Rs50 per kg within hardly two months – is striking. The fact that growers were getting Rs3-5/kg for their produce in May, while even dumping them on roads, should not be lost on consumers. Nor the fact that onions are retailing today at around Rs20, as against Rs90-100 at the year’s start.

  • Food inflation of 7.87 per cent and core inflation increased for the fourth consecutive month to 5.1 per cent in June. Besides, the pass-through effects of the Rs11-12/litre increase in diesel prices since last month are still to be felt

The real takeaway on vegetables is the need for not just investing in cold storages or in-field storage structures, as neither of these alone can reduce price volatility in potatoes and onions. What is necessary – especially when India has moved from being a structurally deficit to surplus producer – is crop area planning. Farmers should have access to credible forecasts of opening stocks, domestic consumption and export demand for all crops to enable them to make the right planting decisions. This is a job an agency like the Commission for Agricultural Costs and Prices should be entrusted with. Wild price and acreage swings ultimately benefit no one – whether farmers, consumers, processors or policymakers.

States too should show policy ingenuity. Take the case of Punjab which faced a serious shortage of migrant farm workers due to the Corona virus outbreak. But the state this year has set a record by bringing 5.01 lakh hectares under cotton cultivation, which is the highest since 2011-12 kharif or summer-sown crop season.

The Punjab agriculture and farmers welfare department had set a target of sowing cotton on 5 lakh hectares under its crop diversification programme. According to state agriculture director Sutantar Kumar Airi, the addition of 25 per cent area to the well-coordinated crop management plan led to record cotton sowing. “After the outbreak of Covid-19, the state authorities had serious apprehensions to meet the target of enhancing cotton sowing in south Malwa region from 3.9 lakh hectares in 2019 to 5 lakh hectares this year. But joint efforts yielded encouraging results,” he said. According to officials,
the state crossed 5-lakh-hectare mark only once in 2011-12 when 5.16 lakh hectares came under cotton crop.

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