On Saturday, the Union government imposed a 40 per cent duty on onion exports. The duty, which will remain in place till December 31, is aimed at ensuring sufficient supply of onions in the domestic market at a time when prices are just about inching upwards. The average modal retail price of onions is currently at Rs 30, compared to Rs 25 this time last year, as per the Department of Consumer Affairs’ data. The latest action, which may seem excessive, seems to suggest that the government is concerned about onions going the way of tomatoes: Tomato prices had soared in July, retailing above Rs 200 in parts of the country. While those prices are now hovering around Rs 80, they are still roughly twice higher than their year-ago levels. But, these aren’t the only instances of government intervention in the food market in recent times. It has also banned exports of wheat, non-basmati white rice and sugar, and has imposed stock limits on tur, urad. and wheat. In early August, with wheat and rice continuing to witness inflation, it also decided to offload 5 million tonnes of wheat and 2.5 million tonnes of rice from the Food Corporation of India’s stocks in the open market.
The price trends seem to suggest that food inflation is now getting generalised. Data from the National Statistical Office showed that along with higher vegetable prices, inflation in July was elevated in cereals (13.04 per cent), pulses and products (13.27 per cent), spices (21.63 per cent) and milk and products (8.34 per cent). It was this surging food inflation that led to the consumer price index rising to a 15-month high of 7.44 per cent in July, breaching the upper threshold of the RBI’s inflation targeting framework. While the RBI expects the current surge in vegetable inflation to be temporary in nature, risks to the broader food basket remain. Rainfall has been low this month — there are indications that August this year could be the driest August in recent times. And there is an increasing likelihood of El Niño strengthening in the coming months. This could potentially impact the upcoming rabi crop.
Sustained high food inflation can influence household inflation expectations, complicating matters for the monetary policy committee (MPC). While the MPC maintained the status quo on rates in its August meeting, looking through this surge in inflation, the government cannot afford to do so. After all, it has an electoral cycle to contend with — a series of state elections will take place towards the end of this year, followed by the general election next year. This supply-side induced inflation shock, which comes after the disruptions from Covid, the Russia-Ukraine war and now El Nino, requires deft economic management. The focus should be more on liberalising imports than imposing domestic trading and export control that have long-term implications. Remember, this is the same government that barely three years ago enacted the three farm reform laws. That has unfortunately been consigned to the dustbin of history, both in letter and in spirit.