Will rice spoil India’s inflation math?

A look at how rising prices of cereals, particularly rice, are turning out to be a major concern.

Amid rain-related concerns about the prospect of the kharif crop, especially rice, the government banned the export of non-basmati rice on July 20. While it is still early days to draw conclusions about the fate of this year’s rice crop, is inflation in cereals, especially rice, emerging as an important concern? This is a question worth engaging with not just from the perspective of short-term inflation management – RBI’s Monetary Policy Committee (MPC) will meet early next month – but also the larger political economy canvas in the run-up to the 2024 national elections. Here are some charts which try to answer this question.

There are rain-related concerns with India's rice production this year.

The charts that matter

• 
  Many key rice-producing states have had abnormal rainfall this year

  The best way to look at this is to compare rainfall deviation from the long period average (LPA) in each state with its share in rice production. Data from the Centre for Monitoring Indian Economy (CMIE) shows that the top six rice-producing states (in 2021-22) are facing a double-digit deviation from LPA in terms of cumulative rainfall. While states such as Punjab and Telangana (they have a share of almost 20% in total rice production) have seen excess rainfall, Uttar Pradesh and West Bengal are facing deficient rainfall. As of now, this does not bode well for the prospects of the rice crop.
• 
  This comes at a time when cereal inflation is already high

  While headline cereal inflation has come down from where it was in the recent past, it continues to be at levels that are far from comfortable. Reading rice and wheat inflation levels shows that while the initial spike and moderation in cereal inflation was driven by wheat prices, the past few months have seen a hardening in rice inflation for 13 consecutive months. It is clear that the government’s decision to ban exports is aimed at shutting down the trade engine of rice prices.
• 
  And things could turn worse with hardening of international prices

  India banning rice exports and changes to the Black Sea grain deal are likely to generate tail winds in international cereal prices. “India is the world’s largest rice exporter, therefore if shipments fall, there could be global price implications, spilling over into wheat, which is a part-substitute. Already, cereal prices are on the uptrend, both domestically and globally, with the latter also affected by geopolitical developments, including changes to the Black Sea grain deal,” said a July 25 research note by HSBC chief India and Indonesia economist Pranjul Bhandari and others. While the July price numbers are yet to be released by most institutional sources, rice prices had already been increasing and wheat prices were not back to their normal levels, even in the June data.
• But a mix of stock-backed PDS and worsening terms of trade for farmers could prevent a major crisis

  The biggest threat with cereal inflation is that of a wage price spiral because of broad-based pressure on prices. “Cereals make up 10% of the CPI basket, and given that they are a staple they affect the price of other items in the CPI basket. In our Granger causality assessment, we find that cereal price inflation tends to drive non-cereal inflation,” Bhandari’s research note says. Is this a real threat for India? The biggest insurance for the government is the fact that its food reserves are adequately stocked. Data from the Food Corporation of India (FCI) shows that against a norm of 135 lakh tonne (115 lakh tonne of operational stocks and 20 lakh tons of strategic reserves), total rice stocks in the central pool were to the tune of 253.5 lakh tonne on July 1, 2023. The total amount of wheat stocks on July 1, 2023 was 301.5 lakh tonne against the stipulated norm of 275 lakh tonne. Barring a very adverse shortfall in rice production followed by a bad crop of wheat in the winter season, the government should not find it very difficult to shield the poor from high inflation in cereals. Measures such as export ban are aimed at controlling market prices of cereals. While they will hurt farmers incomes, it is more likely that the government will prioritise inflation management over aggregate demand as the 2024 elections come closer.