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Importing inflation

India’s decision not to import grain to stock the public distribution system has had a major influence in lowering global prices.

india Updated: Jun 05, 2008 22:18 IST

Interestingly, while influential western opinion holds that rising demand from India (and China) is driving global food prices higher, it is actually pulling them down. Thanks to higher domestic wheat output and record procurement, global wheat prices have decreased from $350 a tonne in February to $250 a tonne now. Obviously, India’s decision not to import grain to stock the public distribution system has had a major influence in lowering global prices. By the same logic, when it did announce that it was going to import, global prices began to harden. The February prices reflected Krishi Bhavan’s announcement that the country might import three million tonnes of wheat in the interests of food security.

Global wheat prices have, in fact, been surging since late 2006 and one explanation for this clearly is India’s decision to import 5.5 million tonnes. International prices had begun to skyrocket when 1.8 million tonnes were purchased last year. In May 2007, prices hovered around $263 a tonne when India stepped in to buy wheat. But they zoomed to $400 a tonne four months later when it finally bought eight lakh tonnes of grain. The moral of the story is that there is no warrant to signal such intentions well in advance to the global market. As stocks are low, prices are bound to spike upwards in response. In this connection, observers have pointed out that China keeps its stock situation a secret.

The big question is why aren’t domestic prices also being pulled down? Inflation is reaching upward to 8 per cent plus, spearheaded by costlier food. Although wheat output touched highs of 76.8 million tonnes in 2007-08, plentiful grain has not had the anticipated impact on prices of wheat or wheat flour in the domestic market. One explanation is that this would happen only with a lag. The southwest monsoon has just set in over Kerala and would spread to most parts of the country in a month’s time. Near-normal rainfall is definitely bound to dampen the burning inflationary fires. The upshot is that while global wheat prices are now heading lower, domestic prices would take some more time to follow suit as inflationary expectations still remain high in India’s economy.