Living With El-Nino: How Food Inflation Can Be Managed Keeping El-Nino in Mind

Why in News?

• The prospect of El Nino hitting India sometime towards the later half of monsoon season has created a new uncertainty about kharif crops.
• Keeping El Nino in mind, food inflation can be kept under control if India uses its trade policy wisely.

 

CPI (Consumer Price Index) Data for March

• Inflation has dropped to 5.66 percent (y-o-y), which is below the upper limit of RBI’s tolerance band of 4 percent +/- 2 percent.
• The primary reason for this drop in inflation is Food Inflation [Vegetable inflation (-8.51%) and Oils and fats (-7.86%)] which is at 4.79 percent.

 

 The effect of low food inflation

• The stress on onion and potato farmers where prices dropped by more than 30 percent (year-on-year) and 20 percent respectively.
• Mustard prices have reached below Minimum Support Price.

 

For RBI:

• It has turned out to be timely in containing inflationary expectations which is the need of the hour.
• Recently, the Monetary Policy Committee stopped its rate hike retaining the repo rate - the interest rate (used by monetary authorities to control inflation) at which the central bank lends money to commercial banks - at 6.5%.

Significance of RBI's decision

• RBI is not blindly following the US Fed in raising interest rates to tame inflation.
• This reflects RBI's confidence in keeping inflation below 6 percent while maintaining the GDP growth above 6 percent.

Challenges

• Under food, inflationary concerns remain high for Cereals, Milk and Milk products and Spices.

 

Cereals

• Inflation is still at 15.3 percent.
• Wheat inflation (non-PDS) is at 20 percent
• It is expected to come down in two months with the procurement in Punjab and Haryana belt.
• But Rain in March has created uncertainty.
• While the government has yet to finalise the output loss, private trade has already started discounting the production target of 112 mt by 4 to 5 mt.

What needs to be done?

• The government can lower import duties on wheat and let traders import if they find it cheaper.
• The bottom line is that there should be ample supplies in the country to avoid any distressed situation.

 

Milk and Milk products

• Milk and milk products have the highest weight in CPI and so, contributes the most to CPI inflation.
• The inflation rate of Milk and Milk products is at 9.3 percent.

 

Cause and Effect of High inflation rate in Milk sector

• Cause
  • The milk production in the country has been growing at 5 to 6 per cent per year.
  • Suddenly the production came to almost a halt in FY23 with overall production at 222 million tonnes (mt) against 221mt achieved in FY22.
  • This has been attributed to Lumpy Skin Disease that has impacted a large number of animals.
• Effect
  • Many companies have increased the price of Milk.
  • Amul has raised its prices three times and Mother Dairy even more in a single year.

What needs to be done?

• In the short term to contain milk inflation, by reducing import duties on skimmed milk powder (SMP) and butter to about 15 per cent.
• In the medium to long run, the Government of India should have a plan to augment good quality fodder supplies and raise productivity of milch animals.

 

El Nino effect 

• There is new uncertainty on Khrarif crops due to the possibility of El Nino hitting India sometime towards later half of the monsoon season.
• Several crops from rice to maize to soyabean to groundnut, and pulses could be under stress.
• Since rice stocks in the country are more than three times the buffer stock norms so there is no need to panic.
• Edible oil prices are already collapsing due to cheaper global prices of palm and other oils. So, there is no need to worry on that account as well.
• But pulses, especially tur and urad can cause concern.

What should be done to minimise the El Nino effect?

• Imports of 2 to 3 mt of kharif pulses by NAFED or through private trade.
• The import duties are already low, and thus no further policy action needed.

Policies to be considered to keep a check on inflation

• The RBI and Centre jointly need to enhance their tool kit.
• India needs to develop commodity futures markets and work on improving their efficiency with information symmetry, and bringing transparency through better technologies and regulatory institutions needs to be a priority.

 

Conclusion

Food inflation can be contained even below 5 percent in FY24 provided India uses trade policy wisely and well in time. Timely decisions and policies by both the Government and RBI can keep inflation under 5 percent and GDP growth at 6.5 percent.

 

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Q1) What is El-Nino? 

An irregular event of warming of pacific waters. It occurs at intervals of two to seven years. 

 

Q2) What is El- Nino’s effect on climate? 

The warm currents flowing towards the east displace the cooler currents to Oceania, rainfall occurs over central and eastern pacific, and drought in Indonesia and Australia.

 

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Source: The Indian Express