News: Recently, The RBI raised the repo rate by 40 basis points (bps) and the cash reserve ratio (CRR) by 50 bps aimed to control inflation.
Why has the repo rate and CRR rate been increased in India?
Domestic Food Inflation
India is seeing high food inflation in wheat, edible oils, maize etc.
Global Food Inflation
The Food and Agriculture Organisation’s food price index has recorded high inflation globally among all commodity group due to supply disruptions from the war, dry weather in South America, high crude prices inducing greater diversion of corn, sugar, palm and soyabean oil for bio-fuel, and so on.
- Therefore, it can be said that the global food inflation is getting “generalised”.
India’s vulnerability to global inflation: The transmission of the above global inflation to domestic food prices basically depends on how much of a country’s consumption/production is imported/exported. Therefore, India is vulnerable to prices of edible oils and cotton. Their inflation can be transmitted to India’s domestic food prices. For example, two-thirds of India’s edible oil consumption is imported and a fifth of Cotton’s production is exported.
Will the measures control inflation, especially food inflation?
Probably not yet. The RBI has been behind the curve by at least 4-to 5 months. It may be difficult to rein in food inflation, which is surging faster than the overall consumer price index (CPI).
India cannot remain insulated from the phenomenon of global food inflation. India is vulnerable to import prices of edible oils and fertilisers.
What are the opportunities from global food inflation?
There has been record breaking cereal export in FY22. Among cereals, wheat exports and rice exports (crossed 20 MMT in FY22 in a global market of 50 MMT) have witnessed an unprecedented growth in FY22.
Therefore, the government has set a target of 10 MMT for wheat exports in FY23 and it has been expected to go even up to 15 MMT.
(A) Monetary Policy
If the RBI has to make up for lost time, it will have to repeat the raising repo rates and CRR by at least three more times in this fiscal year (FY23) to mop up excess liquidity in the system.
(B) The government’s side
Global food inflation is a reality. In order to contain its import of the inflation into domestic market, the domestic production should be stepped up. For this, the government should announce the kharif MSPs with credible procurement plans for oilseeds and pulses. The government should ensure timely availability of seed, fertiliser, crop protection chemicals and credit.
The government should not resort to knee-jerk export bans or stocking controls. This will only disincentivise producers.
The public distribution system and PMGKAY should be rationalzied. The government can effectively target the massive food subsidy and save resources for the higher import bill on edible oils and fertilisers.
In the wake of lower production and procurement of wheat, rice can be used as a substitute for wheat in the NFSA and PMGKAY. The beneficiaries can be given option to receive cash in their Jan Dhan accounts in lieu of grains. This is permitted under NFSA. This can also save on the burgeoning food subsidy bill.
The policymakers should not suppress prices by intervening in the markets through stock limits on traders, putting minimum export prices or outright bans on exports etc.
Indian farmers should be allowed to access global markets to augment their incomes. The government must facilitate minimising marketing costs and investing in efficient logistics for exports to develop more efficient export value chains.
(C) Climate Change Adaptation
The massive Agri-R&D investment is needed to find heat-resistant varieties of wheat and also create models for “climate-smart” agriculture.
Source: The post is based on articles “How to tackle the food inflation and how not to?” published in the Indian Express on 09th May 2022, and “Food inflation has not started to hurt India yet. Stepping up production can help country duck global trend?” published in the Indian Express on 09th May 2022.