Banknote Ban May Ease India Food Prices As Retailers Buy Less

  • Prices of fruit, vegetables fall sharply in wholesale market
  • Consumer food inflation not impacted due to ‘sticky prices’
Photographer: Anindito Mukherjee/Bloomberg

India’s wholesale inflation may ease further as bulk buying of fruit and vegetables at Delhi’s largest market fell by more than 30 percent after Prime Minister Narendra Modi banned high-value banknotes in a surprise move against unaccounted money.

The traders mostly get payments in cash, which now is in short supply. Sales are down by more than 50 percent for Balbir Oberoi, who’s been trading in potatoes for more than two decades. Most of the wholesalers are selling their products on credit, he said.

Distress selling

"Some distress sale of produce by farmers, particularly of perishables, may depress wholesale food prices," said Aditi Nayar, a senior economist at ICRA Ltd., the local unit of Moody’s Investors Service. "At the retail level, the demand for food items is unlikely to fall appreciably because of demonetization and the magnitude of cash in circulation. Moreover, prices of various services may be sticky."

Economists are concerned Modi’s surprise cash clampdown could slow both growth and inflation in Asia’s No. 3 economy. Benchmark consumer price index as well as wholesale price index eased in October, largely on account of food inflation, supporting calls for a rate cut before the central bank reviews its monetary policy on Dec. 7.

The wholesale price of potatoes fell as low as 500 rupees to 600 rupees ($8.8) for a 50-kilogram bag, down from 800 rupees to 900 rupees before the prime minister’s Nov. 8 announcement, Oberoi said. Prices may drop further if sales don’t improve in coming days, he said.

Anil Dua, who’s been trading in coconuts for two decades, is taking payments in checks amid a slump in sales, as well as giving credit to customers who are not able to pay cash.

E-retail lifts

Economists said food prices are not likely to go down much at the retail level as consumers have the option to buy from Mother Dairy outlets, which are allowed to accept old currency, and online stores which accept the payment in several electronic modes.

"People are moving more towards digital modes of payment, at least in the urban areas. That would have taken some demand off the vegetable markets to e-retail," said Dharmakirti Joshi, an economist at Crisil Ltd., the local unit of Standard & Poor’s. He said the ban on currency would pull overall inflation down.

In a teary speech in Goa recently, Modi asked people to support him for 50 days as frustration and anger built up among people queuing up at banks to withdraw or exchange cash. His administration has changed the limits for exchanging cash several times and resorted to measures such as use of indelible ink to handle the rush at bank branches.

The loss of productivity would have a negative impact on growth and could cost India as much as 0.7 percentage points in the short-term, according to N. R. Bhanumurthy, an economist with the National Institute for Public Finance and Policy, a government-backed think tank. 

Besides inflation, the rate review by a panel led by Reserve Bank of India Governor Urjit Patel would also look at latest quarter Gross Domestic Product growth numbers due Nov. 30.

Meanwhile, in Delhi wholesale market, Harish Kumar, an apple trader, has asked his suppliers to reduce stock on lack of demand from retailers.

“We are not getting payments and we have stopped taking payments in old notes,” Kumar said. “We are not in a position to pay to our suppliers -- I expect the situation to normalize in about 10 days.”

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