A little more than a fortnight before the crucial monetary policy review by the Reserve Bank of India (RBI), the government signalled that the recent spurt in inflation, led by spiralling food prices, could be contained by increasing supplies rather than by increasing interest rates to cool demand.
Also Read Major Recommendations
Accordingly, it has convened a meeting of all chief ministers at the end of the month to contain hoarding of essential commodities such as wheat, rice, edible oils and sugar, even while it approved additional duty-free sugar imports to boost domestic supplies.
The meeting with chief ministers is expected to be held on 27 January. The government’s decision, announced by the cabinet committee on prices (CCP), comes at a time when expectations are that RBI would signal an increase in interest rates. The government’s policy planners, however, opposed such a measure arguing that it could nix the economic recovery and that the current round of inflation was caused by surging food prices due to supply bottlenecks.
Addressing a pre-budget meeting of state finance ministers in New Delhi on Wednesday, finance minister Pranab Mukherjee said the price rise in sugar could be attributed to excess demand, but the inflation in rice, wheat, pulses and vegetables was due to supply-side problems that need to be addressed jointly by the Centre and the states both in the short and medium to long term.
Inflation, as measured by the Wholesale Price Index (WPI), jumped to 4.78% in November compared with 1.34% in the preceding month. Food inflation measured as WPI touched 18.2% for the week ended 26 December. Before that it had touched 19.83% for the week ended 19 December, a 10-year high.
Soaring food prices have led to differences within the Congress-led United Progressive Alliance, with some allies openly criticizing the Central government and some blaming agriculture minister Sharad Pawar for mismanagement of the crisis. Pawar heads the Nationalist Congress Party.
According to a minister who attended the cabinet committee meeting, but who did not want to be identified said that information and broadcasting minister Ambika Soni and railway minister Mamata Banerjee criticized Pawar for failing to rein in food prices.
However, senior NCP leader, Tariq Anwar, maintained that Pawar could not be singled out. “It is a collective responsibility of the government.”
The government, meanwhile, is preparing to enhance supply side measures.
“The Prime Minister (Manmohan Singh) will hold a meeting of chief ministers very soon to discuss the situation of food prices and to review the implementation of Essential Commodities Act with a view to prevent hoarding of essential commodities and also to ensure full lifting of wheat and rice allocated to the states,” Pawar said on Wednesday while briefing the media after CCP meeting.
While high prices of sugar is largely attributed to the fact that demand at 23 million tonnes (mt) exceeds the expected domestic supply of the sweetener by 7 mt in the current year, poor offtake of rice and wheat by states are causing rise in retail prices.
The Centre has now asked the states to release 2-3 mt of wheat and rice in the open market over the next couple of months. The government also decided to market 2 mt of wheat and 1 mt of rice for distribution over just above the subsidized rate at which it is distributed to the poor through the public distribution system. “While these prices would be higher than PDS prices they would still be lower than the prevailing retail prices,” said Pawar. Both wheat and rice in the Central pool are much more than the buffer requirement of 7 mt (including strategic reserve of 3 mt which is maintained for exigencies).
By April, the government expects the stock of wheat to be at 14.7 mt and that of rice at 11.5 mt. Until 10 January, states have lifted only around 159,000 tonnes against 1 mt of wheat allocated for sale to retail consumers under open market sales scheme, a finance ministry press release said.
As regards rice, 290,000 tonnes of the rice has been lifted against 500,000 tonnes allotted to the states. Agriculture economist Ashok Gulati feels the government has failed to utilize the food stocks to curb inflation. “Even now if the government decides to offload 5-10 mt of wheat in the open market at say Rs11 a kg prices will come down from Rs19-20 a kg to around Rs14 a kg. It’s that simple and requires no rocket science to do that,” said Gulati.
He suggests a similar exercise in rice besides plugging leakages in the system.
Pawar, however, maintained that while wholesale prices were within reasonable levels, the retail mark-up was almost double in some commodities.
Gulati maintained that this was nothing abnormal.
To tame contain rise in sugar prices Pawar added that over 5.2 mt of sugar has been contracted for import and over 50% had already arrived. “With some more controls we will be able to check sugar prices in 7-10 days,” said Pawar. Retail prices of sugar has been ruling at Rs38-40 a kg.
Gulati, however, suggests subsidising import of sugar. “Allowing import of refined sugar at zero duty is a knee jerk reaction and rather late, when international prices of sugar are very high.”
To ensure enough stocks of edible oil all public sector trading companies such MMTC India Ltd and State Trading Corp. of India Ltd have been instructed to import more pulses, Pawar added.
According to Sudhir Panwar, president, Kisan Jagriti Manch, a farmers’ association, the Central government has limited itself to commodities such as wheat, rice, sugar and pulses and chosen to ignore fruits and vegetable where inflation is almost 16%.
“Besides, the government has already exhausted its effort in sugar and pulses. Why such steps like prevention of hoarding and distribution through Nafed (National Agricultural Cooperative Marketing Federation of India Ltd) and other agencies were not taken earlier,” said Panwar.
Liz Mathew and Asit Ranjan Mishra contributed to this story.