Inflation in India May Quicken as Government Raises Crop Prices to Record

Food-price inflation in India, Asia’s third-largest economy, may accelerate after the government raised the prices it pays farmers for rice and oilseeds to records, making crops costlier, economists said.

The minimum prices for monsoon-sown crops including paddy, soybeans and corn were increased to help boost planting, the farm ministry said in New Delhi yesterday. The federal government sets the crop prices to assure farmers’ incomes, while selling subsidized grains and cooking oils to the poor.

An increase in food prices would add to inflationary pressures in India, where the central bank has boosted interest rates nine times since March 2010. Global food prices reached an all-time high in February driven by stronger demand and harvest disruptions, according to a United Nations gauge.

The higher crop prices in India will “raise the floor price of agricultural commodities,” Shubhada Rao, chief economist at Mumbai-based Yes Bank Ltd., said in an interview yesterday. “It will definitely add to food inflation.”

An index measuring wholesale prices of agricultural products advanced 9.01 percent in the week ended May 28 from a year earlier, the highest level in eight weeks, the trade ministry said yesterday. Overall inflation in India has been above 8 percent for 16 months.

The jump in global food costs has pushed 44 million more people into poverty since June 2010, according to a World Bank estimate. Higher prices helped spark the riots across northern Africa this year, toppling Tunisian President Zine El Abidine.

Policy Concern

Food costs in India have been a concern for the last two years, Reserve Bank of India Deputy Governor Subir Gokarn said on June 2. Inflation needs to be curbed to boost economic growth, Reserve Bank Governor Duvvuri Subbarao said on May 18.

India, the world’s second-biggest rice producer, increased the minimum purchase price of the so-called common variety of raw rice to an all-time high of 1,080 rupees ($24) per 100 kilograms (220 pounds), from 1,000 rupees, the farm ministry said. The soybean price was raised 17.4 percent to a record 1,690 rupees per 100 kilograms and for peanuts by the same amount to 2,700 rupees.

India’s food inflation may accelerate from October when new crops, affected by higher farming costs and rising oil prices, arrive in the market, Ashok Gulati, chairman of the commission that recommends minimum prices to the government, said in May.

“The cost of farm production has risen by close to 20 percent” in the year ended March 31 from a year earlier, Sonal Varma, a Mumbai-based economist at Nomura Holdings Inc., said in a report yesterday. “This suggests that a sharp rise in minimum support prices will be necessary this year to cover farmers’ rising input costs, a potential negative for food inflation.”

Monsoon Rains

Monsoon-sown crops are planted from this month, with harvesting starting in October. The annual weather pattern, which accounts for more than 70 percent on India’s rainfall, may be 98 percent of the average, a level deemed normal, the Indian Meteorological Department said in April.

“Although the hike in minimum support price is valid for rice and wheat for procurement purposes, it serves as a benchmark for other crops, feeding inflation,” said Madan Sabnavis, chief economist at Mumbai-based CARE Ratings. “This year, the rains are expected to be good and the crop is likely to be better. But there will be no relief for inflation as on one hand the government tries to protect the consumers and on the other hand, the farmers.”

Production of food grains from rice to wheat, lentils and corn is estimated to climb 8 percent to a record 235.88 million metric tons in the year ending June after a normal monsoon last year, according to the farm ministry.

Record Rice

Monsoon-sown rice production may climb as much as 7 percent to a record 86 million tons in the 2011-2012 season as normal rains spur planting, Tarsem Saini, president of the Federation of All India Rice Millers Association, said last week.

Bumper crops should prompt the government to ease export curbs, P. Chengal Reddy, secretary-general of Consortium of Indian Farmers Associations, said on June 6.

The country banned shipments of wheat in early 2007 and non-basmati rice in April 2008 to bolster domestic supplies. State reserves of food grains totaled 65.6 million tons on June 1, almost triple the quantity five years ago, according to the Food Corp. of India.

“The government is being overcautious in holding back on exports of rice and wheat,” Sabnavis of CARE Ratings said. “The buffer stocks are ample and the government should dispose the surplus as there is lack of adequate storage space.”

To contact the reporters on this story: Prabhudatta Mishra in New Delhi at pmishra8@bloomberg.net; Pratik Parija in New Delhi at pparija@bloomberg.net

To contact the editors responsible for this story: James Poole at jpoole4@bloomberg.net; Sam Nagarajan at samnagarajan@bloomberg.net

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