Frozen Carrots, Fruity Pepsi: Weapons in India Inflation War

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Laborers pack carrots into bags at a wholesale market in Jammu, India. Photographer: Channi Anand/AP Photos

The workers extracting mango pulp, freezing carrots and packing spring rolls in southern India are the foot soldiers in Indian Prime Minister Narendra Modi’s inflation war.

The complex is one of four government-backed “mega food parks” intended to jumpstart a nascent food processing industry. Modi plans to help build another 38 to reduce wastage that sees a third of all fruits and vegetables tossed in the trash, pushing up prices for India’s 1.2 billion people.

The effort is more crucial than ever after his government agreed with the central bank to target consumer price inflation at about 4 percent in the next few years. Since food prices account for about half of India’s CPI basket, Reserve Bank of India Governor Raghuram Rajan has little scope to reduce interest rates if they aren’t contained.

Food prices account for about half of Indias CPI basket
Food prices account for about half of India’s CPI basket

“If it doesn’t get any clear indication of food reform, then I’m afraid the RBI just needs to hold tight,” said Pranjul Bhandari, an economist at HSBC Holdings Plc. Long-term measures to bring down food costs are the only way to reduce inflation “without killing growth” as demand picks up, she said.

Food prices are one of the key indicators Rajan will consider next week when deciding whether to reduce India’s benchmark rate from 7.5 percent, one of the highest in Asia. Consumer inflation fell to 4.87 percent in April, a four-month low and well within his target of 6 percent by January.

It may get harder from here on. Oil prices are creeping back up and demand may accelerate along with economic growth, adding to price pressures.

‘Very Proactive’

Modi has taken short-term steps to control food prices during his first year in office. These include selling some of the nation’s wheat stocks on the open market, pushing states to let farmers sell fruits and vegetables directly to consumers, and capping growth of guaranteed prices for cereal crops.

“They have been very proactive,” said Gautam Chhaochharia, an analyst with UBS Group AG in Mumbai. “They realize that bringing inflation down at a lower level is critical for long-term economic recovery.”

Processing more food is one of many longer term prescriptions for fixing India’s agricultural sector. A lack of refrigerated storage and transportation means that farmers often sell goods quickly to middlemen who can manipulate prices.

“Reducing the supply-demand gap in agriculture production in the long-run and improving supply logistics will be of utmost importance for assuaging food price pressures,” said a working paper published by the Reserve Bank of India in October.

The scope for gains is massive. Modi aims to increase the level of food that is processed to 25 percent by 2025 from 10 percent now. Only about 2 percent of domestic production of fruits and vegetables is commercially processed, compared with 80 percent in Malaysia and 30 percent in Thailand, according to the Federation of Indian Chambers of Commerce and Industry.

‘Mega Food Parks’

The idea to start “mega food parks” began in 2008 under Modi’s predecessor. The plan is to bring together warehouses, cold storage, ripening chambers and other facilities to create clusters around the country that farmers could easily access.

Of the 42 mega food parks planned by the government, four are operational, 21 are under construction and 17 have been pre-selected to replace former projects that were withdrawn or canceled. When all are completed, they’ll employ 80,000 people and help half a million farmers, according to the government.

Modi in September inaugurated the mega food park north of Bengaluru, which spans an area roughly the size of 80 football fields. Built by retail conglomerate Future Group, the facility employs 400 people. Food is collected from six locations in Karnataka state and brought to the park.

Coke, Pepsi

During the plant’s opening, Modi called on Coca-Cola Co. and PepsiCo Inc. to blend 5 percent fruit juice in their drinks to boost incomes for farmers. A Pepsi spokesman declined to comment. Coca-Cola referred questions to the Indian Beverage Association, which didn’t respond to e-mailed queries.

“If we reduce wastage, we will increase availability,” Food Processing Minister Harsimrat Kaur Badal told a seminar earlier this month. “That means lower inflation.”

About 700 billion rupees ($11 billion) worth of fruits and vegetables were wasted in 2010-2011, a third of the entire production, according to Crisil Ltd., the local unit of Standard & Poor’s. It blamed a lack of rural infrastructure for the slow development of the food processing industry.

While mega food parks are “a positive step,” India also needs to raise productivity and production, said Dharmakirti Joshi, chief economist at Crisil.

Future Group is now in talks with companies to use the grain silos, spice mill and cold storage in its new food park, according to Chief Executive Officer Praveen Dwivedi. The potential in India is “completely untapped,” he said.

“India is a country where people typically use and eat fresh produce,” Dwivedi said. “Things are changing.”