Since March 2021, prices in the wholesale markets have been rising much faster than in the retail markets in India. Consequently, many experts predicted retail inflation would slowly ‘catch up’ with wholesale inflation in the coming months. In April 2022, at least in case of food, this ‘catching-up’ appears to have happened (LHS in Figure 1).
Food inflation in the pipeline is finally showing up at retail levels. Since crops like pulses are cheaper, should the Narendra Modi government rethink the open import window to support farmers?
As per the recently released WPI and CPI data, in April 2022, food inflation at wholesale and retail levels averaged about 8.8 and 8.4 per cent respectively (Figure 1). This gap of about 0.4 per cent is much smaller than say the gap of 4.2 per cent observed in January 2022 when the inflation rates were 9.6 per cent and 5.4 per cent respectively. For the catching-up, while the WPI food (WPIF) inflation rates slowed down a little (since February 2022), and CPI food or CPIF inflation rates rose much faster (since October 2021).
But at the overall CPI and WPI levels, inflation rates continue to be far apart. In April 2022, while the wholesale inflation rate averaged about 15.1 per cent, the retail rate was still little more than half, at 7.8 per cent. Gap between the two inflation rates has been over 7 per cent since September last year. In the last 15 years, such a large positive gap has never been observed. Much of this gap appears to be explained by commodities like primary or intermediate goods that are not covered by CPI. For example, energy sector. In April 2022, global inflation in energy index (including coal, crude oil and natural gas) was about 90 per cent (World Bank). Domestically, as measured under WPI’s crude and natural gas sub-index, inflation was about 69.1 per cent. By design, CPI does not cover these commodities. However, CPI considers them via their impact, like via its ‘fuel and light’ index. In April 2022, this index showed an annual inflation rate of about 10.8 per cent.
We return to the food inflation rates.
The commodities selling cheaper
While a lot has been talked about commodities that have become expensive, not much is being talked about commodities that are selling cheaper than last year. And there are a few important crops in that category. Let us consider onions. Last year, onions sold at about Rs 15.30/kg at this time in the biggest onion wholesale mandi of the country, Lasalgaon in Maharashtra. This year they are selling at Rs 8.5/kg. As per April 2022 inflation rates, onion CPI fell by 3.8 per cent and WPI by 4 per cent.
Eggs are a surprising entry into this category of low inflation. Poultry feed has two main components: energy and protein. While energy is largely derived from grains like maize, wheat, broken rice, etc., proteins are derived from oil meal cakes like soybean, mustard, etc. Everything is expensive from maize to soybean oil cakes now, but CPI eggs show a 0 per cent inflation rate in April 2022. In case of chicken meat, CPI inflation rate is about 14 per cent. Apparently, the feed cost impact in broiler (birds reared for meat) is more than in eggs.
Pulses are a forgotten lot. Barring masur (lentils) and rajma, most pulses are selling cheaper than last year at wholesale level (Table 1). Just last year we were fighting double-digit inflation in pulses driving the Narendra Modi government to undertake a series of steps to fight that inflation. From imposing stocking limits to signing MOUs with Myanmar, Malawi and Mozambique, the government took aggressive steps to control pulse prices. It even opened imports of tur, moong and urad in May 2021. In March 2022, it extended the window for ‘free’ imports for urad and tur till March 2023. Not surprisingly, inflation rates for these pulses have been low or falling.
While lower inflation is good for consumers, does it disincentivise the farmers from sowing such crops in the coming months? Interestingly, all the three pulses—urad, tur and moong—are sown in kharif season. Farmers would now be deciding the crops they will grow in kharif 2022. Till now, prices of all three are ruling marginally above or closer to the MSP. Is a window of duty-free imports till March 2023 a dampener for urad and tur farmers? And, due to higher price realisations, will the farmer be incentivised to grow oilseed crops like soybean instead of pulses this year?
The kharif sowing data does not raise alarms yet, however, the government will do well to keep a close tab and ensure that pulses do not become a crisis item by this year-end. For the country’s nutritional security, the Modi government has strategically invested in Indian pulses by raising MSPs over time. But after taking aggressive steps to curb price pressures in 2021-22, the government should now review the import duties and quotas so that farmers continue to have an incentive to grow pulses.
Global inflation and Indian monsoons
In the coming months, inter alia, two risk factors emerge for Indian agri-prices: (i) continued contagion from high and rising global inflation; and (ii) monsoon rains.
Food and Agriculture Organization (FAO)’s cereal price index in April 2022 was higher than during the 2008 food crisis. Its vegetable oil index has reached unparalleled peaks (Figure 2). Via imports, and greater export opportunities these higher global prices are likely to continue to pull up domestic prices in the coming months.
Domestically, monsoons are the next critical factor. Unprecedented heat levels in March 2022 in north-western states and drying and erratic monsoon rain patterns are some of the palpable outcomes of the ongoing climate crisis India is witnessing today. With about 48 per cent of country’s gross cropped area (GCA) still dependent on rains for irrigation, the centrality of monsoons in the country continues. As per IMD’s first forecast, monsoons this year are likely to be normal. However, threats of long dry spells, and erratic monthly and geographic spread loom large.
With thin wheat stocks and growing paddy exports, pressure on kharif and particularly paddy crop to do well is huge this year.
Both authors are with Arcus Policy Research. Views are personal.