Well begun is only half done – rains start but food prices up

By Shrikant Kuwalekar

MUMBAI: The promising onset of the south-west monsoon may have assuaged concerns of deficient rains this year, but preliminary trends in prices of food items, including vegetable, pulses, and meat, suggest that the threat of a rise in food inflation still looms.

While there is no sign of major correction in four-month long rally in pulses, prices of other food items, especially onion, poultry and meat can also drive Consumer Price Index-based inflation to higher levels, given their significant weight in the price basket. Although high prices of pulses have been in the spotlight over the past several weeks, broiler and eggs also seem to be following suit.

Broiler prices have now topped 100 rupees per kg in wholesale market and eggs are trading above 420 rupees per 100 pieces, to scale new historic highs. Today paper rate of eggs in benchmark Pune market was 435 rupees per 100 pieces, National Egg Coordination Committee data showed.

Broiler chicken prices at benchmark Nashik and Pune markets touched a record of 105 rupees a kg Wednesday, according to the Pan India Broiler Coordination Committee. “Seasonal shortage of fish, decline in number of birds due to high temperatures in Apr-May and demand for mid-day meal in schools in Tamil Nadu are responsible for the ongoing rally in poultry and meat prices,” said Deepak Chavan of Farm Features, an independent poultry research firm.

Consumption of eggs and broilers typically goes up when temperatures drop, which seems imminent due to onset of monsoon in most of the country. The combined weight of eggs, fish and meat in the CPI basket is 4.04%, higher than the 2.38% weight allotted to pulses.
After falling to a four-month low of 4.87% in April, India’s headline inflation rate based on the new Consumer Price Index rose to 5.01% in May, mainly driven by vegetables, pulses and transportation.

MSP hike effect
Prices of three major kharif pulses–tur, urad, moong–have touched their historic highs rising nearly 70% in the last 4-5 months, mainly on account of sharp fall in domestic crop. Chana prices have also risen 30% in the last few months and at current fundamentals the rabi pulses is set to witness historic highs above 5,000 rupees per 100 kg, most likely by October.

The full impact of record high prices in major pulses is yet to percolate in retail prices. Tur, moong and urad are currently hovering in a range of 130-140 rupees a kg in fair price shops and are expected to notch up a further 5% rise later this month, which may reflect in June inflation.

Though government has announced mega import plan for pulses, any major price correction in the near term may be hindered by record-high prices overseas, and a weaker rupee. In a latest development, the Centre has announced hefty hike in minimum support price of pulses. Tur and urad MSPs for 2015-16 marketing year were raised to 4,625 rupees per 100 kg each from 4,350 rupees. Moong MSP has also been hiked to 4,850 rupees from 4,600 rupees. The MSP includes 200 rupees per 100 kg bonus.

The hike in MSP for pulses is unlikely to have any incremental impact on food inflation, as current prices of pulses are way above MSP levels and unlikely to fall in the medium term. However, the MSP hike would raise the floor for prices of pulses.

The inflationary impact may be more pronounced because of 50 rupees-per-100 kg hike in MSP for paddy, as the cereals group has the highest weightage of nearly 9.67% in CPI. According to an estimate by Nomura, the aggregate hike in MSP for 2015-16 (Apr-Mar) has been around 3.5%, and every 1% increase adds around 15 bps to the headline CPI inflation rate.

Nomura, however, maintained its average CPI inflation forecast of 5.0-5.5% for the current financial year that began in April.

Vegetables Next?

The vegetables group which has a sizeable weight of 6.04% in the CPI basket, also seems headed for an upward march due to seasonal factors such as fall in output, hit further by logistical problems caused by supply disruption during rains.

For example, the prices of the politically sensitive onion have already shot up to 35-40 rupees a kg in Mumbai and experts are expecting it to hit half-century mark in the short term due to impending shortage of the commodity. The availability of leafy vegetables, tomatoes, cauliflower and beans will also substantially come down during Jun-Jul and adversely impact vegetable prices.

Despite abundant availability, potato prices may also go up as a spillover impact of higher prices of pulses and other vegetables, adding pressure on food inflation. While all roads seem to be heading north as far as food prices are concerned, it remains to be seen whether the rise would be sharp enough to overcome the favourable base effect that would be in place till August.

The intensity of government market interventions would play important role in taming the food inflation. The Centre has already announced mega import plan for pulses, and warned stringent action against hoarding of essential food items. However, firm plan in this regard is yet to be unveiled.

Secondly, if monsoon rains happens to beat forecasts on the positive side for the entire season, it could completely change the economic and inflationary outlook from August onwards. During Jun 1-17, the country received 80.7 mm of rainfall, 11% above normal. The Indian Meteorological Department has predicted this year’s south-west monsoon rainfall at 88% of the long period average.

All said and done, the next couple of months would serve as a litmus test for the government’s food management policies and its ability to keep a check on inflation.

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