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Bad monsoons could cause increased food prices

The prediction of a below-normal monsoon could bring back the spectre of high food prices.

business Updated: Jun 03, 2015 23:41 IST
HT Correspondent
HT Correspondent
Hindustan Times

The prediction of a below-normal monsoon for the second year, after a lingering bad winter of hailstorms and unseasonal rains, could bring back the spectre of high food prices.

India’s retail inflation rate fell to 4.87% in April from 5.25% in the previous month. Retail food inflation, a measure of how costly the platter has become over a 12-month period, rose at a slower 5.11% in April from 6.14% in March. An unusually dry summer, however, can very rapidly push the inflation rate above the Reserve Bank of India’s (RBI’s) tolerable threshold level of 6%.

“Monsoon failure clearly remains the biggest risk this year, and some volatility in food prices could be possible despite government intervention. Also, while ample stocks of rice and wheat can be released to curb inflation, there is concern that prices of other affected commodities such as pulses and oilseeds, where buffer stocks are not available in the central pool, and fruits and vegetables, where extended storage is not possible, could flare up,” credit rating agency Crisil said in research report.

Risks of spiralling food prices are somewhat higher this summer, when the impact of unseasonal rains is expected to be felt. A bad winter crop could aggravate shortages.

Already, India looks set for a reduced winter harvest, which could cut up to 20% of the country’s wheat output, besides 30% of mango plantations and damages to slew of other food crops.

“While lower agricultural output is a risk to food price inflation, the actual impact will depend on the government’s food management policy and whether weak rural wages (lower input costs) can offset the supply shock (adverse monsoons),” said Sonal Varma, executive director and India economist at broking and research firm Nomura.

“Overall, risks to agricultural production, rural demand and food price inflation have increased, but the actual impact will be known only sometime in July,” Varma added.

Also, the RBI said it will keep a close watch on the monsoon this year, in the backdrop of the prediction of below-normal rains for the second year.

The central bank expects inflation rates to creep up to 6% by January 2016, from the earlier forecast of 5.8%, on the back of deficient summer rains and higher service tax rates, which has been raised to 14% from 12.36% earlier.

Experts said the weak forecasts have raised the chance of inflation climbing.

“Astute food management is needed to mitigate possible inflationary effects. A conservative strategy would be to wait, especially for more certainty on both the monsoon outturn as well as the effects of government responses if it turns out to be weak,” investment bank Morgan Stanley said in a research report.