Why even a good monsoon may not bring food prices down
As India heads into its four-month rainy season, the country is banking on the monsoon for higher food output and lower prices, but contrary to assumption, the rains don’t always put a lid on inflation.india Updated: Jun 10, 2016 12:28 IST
As India heads into its four-month rainy season, the country is banking on the monsoon for higher food output and lower prices, but contrary to assumption, the rains don’t always put a lid on inflation.
Some economists argue the rain-bearing system’s role in lowering prices is overstated. Ratings firms, with their eye on inflation, agree. The truth is halfway in the middle, data show.
There’s no one-on-one correlation between prices and rainfall. On June 7, Reserve Bank governor Raghuram Rajan, while holding rates, cautioned that a good monsoon alone wouldn’t keep prices down. Along with good rains, he said, India needed “astute food management, as well as steady expansion in supply capacity, especially in services” for steady prices.
The upshot is that a bad monsoon, if accompanied by drought, almost usually drives short-term prices high – like in 2009 – but conversely, a good monsoon doesn’t necessarily ease inflation.
Food inflation was low (below 5%) even when the rains were below normal like in 2001-02, 2002-03, 2004-05. In these three years, the monsoon ended up to be 91%, 81% and 87%. According to the Met’s classification, the monsoon is normal when it is between 96-104% of the 50-year average rainfall of 89cm.
Yet, during last eight years of a good monsoon, prices were low – below 5% -- only in two years: 2003-04 and 2005-06.
Good rains always mean higher farm output. Prices should cool because supply increases. That golden rule of economics can’t change. So, what drives food prices? “Rather than rainfall, it’s minimum support prices, nominal rural wages, agriculture input costs and global food price trends,” says Sonal Varma, an economist with ratings firm Nomura.
Simply put, government policies, farming costs and international food prices all can offset the price-lowering effect of the monsoon.
High global prices will always drive up food inflation because India imports pulses and oilseeds to meet domestic requirement.
Higher minimum support price (MSP), or the floor price set by the government for farm produce, also fans inflation. A 10% MSP hike raises short-term wholesale inflation by 1 percentage point. If rural labour costs are high, as in 2007-09, it adds to food prices by way of increasing the cost of producing food.
Crude prices are rising again. Nothing stokes inflation more than the price of oil.