The Paradox of Bumper Crop and Rising Cereal Prices

Why in News?

• According to official production statistics, there is no grain shortage in the country. However, this is not reflected in the rising cereal prices.
• Cereal inflation based on the official consumer price index (CPI) has been ruling at double digits year-on-year since September 2022. 

India’s National Food Security Act (NFSA) 2013

• The NFSA was enacted to mark a paradigm shift in the approach to food security from welfare to rights-based approach.
• The Act legally entitles up to 75% of the rural population and 50% of the urban population to receive subsidised foodgrains under Targeted Public Distribution System (PDS).
• About two thirds of the population therefore is covered under the Act to receive highly subsidised foodgrains.
• As a step towards women empowerment, the eldest woman of the household of age 18 years or above is mandated to be the head of the household for the purpose of issuing of ration cards under the Act.

The Recent Shift in NFSA Entitlement and its Effect

• From the new calendar year (Jan 23), the NFSA entitlement was restored to the original 5 kg/person/month level prevailing prior to April 2020.
• The same ration cardholders now have to purchase rice and wheat from the open market and they are affected by the double-digit cereal inflation.

The Current Situation of Cereal Inflation

• Cereals and products inflation is high at 12.71 per cent. It contributes about 22.8 per cent to CPI inflation, as it has a high weight of 9.7 per cent in the food group in the CPI basket.
• The inflation rate for wheat stands at 12.37 per cent despite the recent ban on exports and the stocking limits on traders and processors and rice inflation stands at 11.78 per cent.
• According to the Department of Consumer Affairs, the retail price of rice on September 3 was Rs 40 per kg, compared with Rs 35 a year ago and Rs 30 two years ago, and for wheat it was at Rs 28, Rs 25 and Rs 22 per kg.

The Contrast Between Three Covid Financial Years and Current FY wrt Grains Availability

• Enough Grains for Domestic Consumption and Exports During Three Covid Years
  • During the 3 post-Covid financial years (April-March) of 2020-21, 2021-22 and 2022-23, the offtake of rice and wheat way above the average lifting of 62.5 mt during the first seven years after the implementation of the NFSA from 2013-14.
  • The PDS emerged as the most effective social safety net during the pandemic. There was no dearth of grain for the poor and vulnerable, even amid the massive job and income losses following the lockdowns.
  • During this period, India’s exports of rice and wheat also hit all-time-highs. In other words, it was a time of abundance.
  • Not only was there more than enough grain to give out free, the country could also ship out record quantities.
• Depleting Grain in Government Stocks with High Cereal Prices in Current FY
  • Depleting rice and wheat stocks in government godowns has led the Centre to stop issuing the 5-kg of additional grain per month to NFSA beneficiaries from January.
  • The Karnataka government has been forced to give cash instead of an extra 5-kg free rice that was promised for all members of poor households in the party’s Assembly election manifesto.

Steps Taken by the Government to Tame Cereal Inflation

• Wheat Export Ban
  • Since May 2022, the government has banned exports of wheat.
  • In June this year, stock limits were imposed, with wholesale traders and big retailers not being allowed to hold more than 3,000 tonnes of the cereal at any time.
• Rice Export Ban
  • In July, exports of all white (non-parboiled) non-basmati rice were prohibited. On August 25, a 20% duty was levied on parboiled non-basmati rice exports.

Take Aways from the Government’s Decision

• Grain Shortage: The Centre’s actions point to grain shortage not just in public warehouses, but also in the open market.
• Can Improve Domestic Availability: The imposition of export curbs and stockholding limits are essentially aimed at improving domestic availability of grain and preventing any “hoarding and unscrupulous speculation” that normally ensue from shortages. 

The Paradox of Bumper Crop and Rising Cereal Prices

• No Grain Shortage as Per Government Estimates
  • According to the data, there is a 11.2 mt increase in India’s rice output between 2020-21 and 2022-23.
  • Wheat production, too, has registered an overall 3.2 mt rise, despite reports of yield losses from the heat wave in March 2022 and unseasonal excess rain in March 2023.
• Rising Cereal Prices Despite Government’s Claim of No Grain Shortage
  • The higher productionis not reflected in procurement. Also, government grain purchases have fallen and particularly sharply for wheat.
  • Even after netting out procurement and exports, the domestic market supplies of both rice and wheat have apparently gone up in the last two years.
  • It raises the question;if there is more wheat and rice in the market, shouldn’t that reflecton cereal prices and why cereal inflation is still in two digits?

What Could Be a Better Way to Tame Wheat and Rice (non-PDS) Inflation?

• Reducing the Import Duty
  • The government should reduce the import duty on wheat from 40 per cent to say 10 per cent.
  • And for rice, unload excess stocks in the open market at lower prices than what the FCI has been doing recently.
• Revision of Food and Beverages in the CPI
  • There is also a need to revise the weight of food and beverages in the CPI basket because this is outdated and based on the 2011 consumption survey.
  • This weight currently is 45.9 per cent, and food alone is 39 per cent.
• Engel’s law clearly shows us that with rising per capita income, people will spend less on food.
  • Researchers also suggest that the weight of food and beverages will be around 38 per cent in the CPI basket in 2023 and that of food alone about 33 per cent.
  • With the old weights, there is a possibility of overestimating CPI inflation, which needs urgent correction.

Conclusion

• Government estimates of record rice and wheat production do not match with double-digit cereal inflation since last September.
• The imposition of export curbs and stockholding limits also point to grain shortage. This shows a paradox.
• India can bring down the cereal inflation and contain CPI inflation within 6 per cent, provided it uses policies for food products liberally and well in time.

Q1) What is RBI’s Monetary Policy Committee (MPC)?

The Monetary Policy Committee (MPC) is a committee constituted by the Central Government and led by the Governor of RBI. The Monetary Policy Committee was formed with the mission of fixing the benchmark policy interest rate (repo rate) to restrain inflation within the particular target level.

Q2) What is the consumer price index and its main components?

It refers to a measure of price changes in a basket of consumer goods and services purchased by households. It measures price fluctuations at the consumer level and is divided into eight categories: education, communication, transportation, recreation, clothes, foods and beverages, housing, and medical care. The main components of CPI and their weightage are Food and Beverage – 45.86%, Housing – 10.07%, Fuel and Light – 6.84%, Clothing and Footwear – 6.53%, Pan, tobacco, and intoxicants – 2.38%, Miscellaneous – 28.32%.

Source: The Indian Express