Food prices tread easy but political considerations are a risk
While keeping food prices low is seen as good economics, and it also benefits the poor, its adverse effect on farmers makes for bad headlines
Food inflation is a key variable for Indian policymakers. A benign trend in global food prices should, therefore, offer them comfort.The Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) will meet this week to decide on interest rates, and food inflation is sure to figure in the discussions. With domestic food inflation trending lower, MPC may temper its concerns on inflation, according to a Mint column.
Though the link between global food prices and domestic prices is not immediate due to trade restrictions, it is more visible in commodities such as sugar and edible oils and dairy products to the extent that trade takes place in these commodities.
The World Food Price Index for February came in at 170.8 points, up slightly compared to its January level but 2.7% below its year-ago level, and down from the peak of 2017. The price of dairy and wheat rose while that of sugar and vegetable oils fell, on a sequential basis.
If this uptrend continues, it could be a worry but that looks less certain. Global sugar prices have continued to decline in March due to a rising supply situation. Palm oil prices also fell in March as did that of soya bean, and even dairy prices showed some weakness.
Of particular interest to India would be what happens to cereals. The cereal outlook of the Food and Agriculture Organization of the United Nations shows that supplies are comfortable in 2017-18 which is supporting a continued period of low international prices.
India’s wheat crop in 2018-19 is projected at 94 million tonnes (mt) by the US Food and Agricultural Service’s Grain and Feed Annual report, lower than the previous year’s 98.5 mt, but still the fourth highest production on record. The report also estimates rice output at 110 mt and corn output at 25.5 mt, only slightly lower than a year ago. This assumes normal weather conditions.
If all this suggests that food supply will be comfortable and prices could indeed remain low, there’s one surprise element in the mix. India’s general election is due early next year. While keeping food prices low is seen as good economics, and it also benefits the poor, its adverse effect on farmers makes for bad headlines. This year’s budget saw the government making promises on support prices for farm products. The government’s budget promises of fixing minimum support price (MSP) at cost-plus 50% and ensuring all farmers get MSP for all crops will push up prices by 15%, which will see farm incomes rise but inflation will increase as well, according to an internal NITI Aayog document, according to a Mint report.
If the government fulfils its promises in a bid to win rural votes, there is a risk that domestic prices may move in the opposite direction compared to global prices in the near term at least.
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