The first official gauge of the economy’s performance so far in 2024-25 pegs real GDP growth at 6.7% between April and June, a five-quarter low and below the central bank’s projection. The Reserve Bank of India (RBI), which expects a 7.2% GDP growth through 2024-25 following last year’s 8.2% surge, had revised its estimate for Q1 from 7.2% to 7.1%, earlier this month. The actual numbers are underwhelming and mark a clear cooling in the economic momentum, although some base effects are in play. Growth in the Gross Value Added (GVA) in the economy came in higher at 6.8%, after a year of widening divergences with the GDP print. At the onset of this fiscal year, major hopes hinged on a normal monsoon boosting farm sector output and easing inflation, which could lift the weak rural demand and private consumption witnessed last year. Higher demand would bolster private firms’ propensity to invest in new capacities, and ease the pressure on public spending to prop up growth. That the government would still ramp up capital expenditure by 17% to ₹11.11 lakh crore this year, while it waited for this narrative to unfold, was the other pillar underpinning this year’s growth aspirations.

As things stand, this script is yet to fully play out. The stretched general election has sharply scuppered public capex, and the government will need to redouble efforts to meet its spending goals. The good news is that private consumption spends bounced to a six-quarter peak of 7.4%, partly thanks to easing headline inflation. But food prices remain elevated. The monsoon has been better than last year but a tad erratic and uneven, temporally as well as spatially. Farm GVA growth has moved up to a four-quarter high of 2% but the next few weeks will determine whether the sector rebounds in earnest (and food inflation cools). Projections of above normal downpours in September may well affect standing kharif crops. This is a key monitorable for the RBI, whose independent monetary policy panel members have flagged a 1% GDP growth loss this year and next, if interest rate cuts are delayed. India may still grow 6.5% to 7% this year, but most expect growth to slip to 6.5% in 2025-26, with the medium-term potential hovering around that number. This is too slow for comfort. As top IMF official Gita Gopinath pointed out recently, policymakers need to urgently pursue meaningful reforms across all aspects of the economy, and improve the efficiency of its institutions and the judiciary. This is critical to lift its growth potential and fulfil hopes of creating gainful employment for its young, fast enough for India’s demographics to yield a dividend.

Headline inflation has slowed in India mainly because of lower food prices, but the volatility of these prices remains an issue, Moody’s Ratings said.
| Photo Credit: PTI

Volatile and high food prices remain a concern, but base effects may help temper India’s retail inflation pace in June and possibly even cool it below 4% over July and August, rating agencies and economists reckon.

Retail price rise had touched a 12-month low of 4.75% in May, even though food inflation stayed stuck at 8.7% for a second straight month. The National Statistical Office will likely release the Consumer Price Index data for June on Friday.

Headline inflation has slowed in India mainly because of lower food prices, but the volatility of these prices remains an issue, Moody’s Ratings said in a report this week. The agency also flagged stronger wage gains of more than 5% year-on-year.

The prolonged heatwave and the delayed start to the southwest monsoon was likely to have pushed June’s inflation to 5%, said Radhika Rao, executive director and senior economist at DBS Bank. Vegetable prices began to rise sharply as the month progressed, while telecom tariffs were also raised, she pointed out. 

With the monsoon regaining ground this month, vegetable prices were expected to moderate, and base effects would also push July-August inflation to sub-4%, she estimated. Ms. Rao, however, expects no interest rate cuts this year in light of the RBI’s signal that they would look through base effect-driven swings in readings and focus on sticky food pressures. 

In June 2023, retail inflation stood at 4.9%, before it surged to 7.4% and 6.8% in July and August, respectively.

India Ratings and Research expects retail inflation to have moderated to a 13-month low of 4.5% in June, due to a combination of the favourable base effect and a moderation in inflation of key items. But wholesale prices are projected to quicken at a 3.5% pace, from May’s 15-month high of 2.6% due to an unfavourable base.

“Prices of food items such as onion and potato continues to be high, despite softening of inflation in items such as tomato, pulses, milk and sugar,” the agency noted. Tomato inflation was at a six-month low of 29% as per Department of Consumer Affairs data for last month, it added.

RBI Governor Shaktikanta Das speaks at the Delhi School of Economics Diamond Jubilee Distinguished Lecture, in New Delhi, on Sept. 5, 2023.
| Photo Credit: PTI

Reserve Bank Governor Shaktikanta Das on Tuesday said the central bank is committed to bringing down inflation to 4% and will remain watchful of risks as more frequent global supply shocks can have profound implications on the management of the price situation.

Delivering a lecture at the Delhi School of Economics, the governor said the RBI remains on guard to ensure that the second-order effects in the form of generalisation and persistence with regard to inflation are not allowed to take hold.

The central bank has been mandated by the government to keep inflation at 4% with a margin of 2% on either side.

“The frequent incidences of recurring food price shocks pose a risk to the anchoring of inflation expectations, which has been underway since February 2022. We will remain watchful of this aspect also.”

“The role of continued and timely supply side interventions as is being undertaken by the government assumes criticality in limiting the severity and duration of such food price shocks,” he said.

In these circumstances, he said, it is necessary to be watchful of any risk to price stability and act timely and appropriately.

“We remained firmly focused on aligning inflation to the target of 4%,” he said without giving any timeframe.

He also said that inflation, which had touched a high of 7.4% in July, driven by a rise in vegetable prices, has started moderating.

A man cooks food at his home adjacent to railway track, as a train passes near the Daya Basti area in New Delhi on Tuesday, September 22, 2020.
| Photo Credit: MOORTHY RV

The report, ‘State of Food Security and Nutrition in the World’ (SOFI) 2023, published last month, shows that while the cost of a healthy diet has increased in recent years in India, it is still the lowest among the BRICS nations (including the newly added six countries) and India’s neighbours. However, the share of people who are able to afford such a healthy diet is still low: India features at the bottom of that list since income levels are stagnant or going down. SOFI is published by the Food and Agriculture Organization and jointly produced with fellow United Nations agencies.

The Data Point published on Wednesday concluded that the cost of meals in Mumbai rose by 65% in five years, while salaries/wages rose by just 28%-37%. Mumbai was chosen as an exemplar due to the availability of consistent data. Today’s analysis takes a broader view by comparing India’s numbers with other countries.

In the SOFI report, the cost of a healthy diet is arrived at by looking at the cheapest local food items that meet dietary guidelines. The cost and availability of such food items is averaged from national data. To check if the diet is affordable, its cost is compared to the average income in each country. A diet is considered too expensive if it costs more than 52% of a country’s average income. This percentage is based on data showing that people in low-income countries spend about 52% of their income on food. The percentage of people who cannot afford this diet is then calculated by using income distributions within a nation.

Chart 1 | The chart shows the cost of a healthy diet in terms of PPP dollars per person per day in 2021, the latest year with comparable data.

Charts appear incomplete? Click to remove AMP mode

For instance, in India, a healthy diet costs 3.066 PPP dollars per person per day, the lowest among the countries considered. PPP stands for ‘Purchasing Power Parity’. In simple terms, 1 PPP dollar in the United States should buy the same amount of goods and services as 1 PPP dollar in, say, India or Brazil. The cost of a healthy diet expressed as ‘X PPP dollars per person per day’ means that it would cost that much per person every day to maintain a healthy diet, accounting for differences in the cost of living between countries.

Chart 2 | The chart shows the share of the population that is unable to afford a healthy diet in 2021.

For instance, in India, 74% were not able to afford a healthy diet, the fourth highest share among the nations considered. Charts 1 and 2 show that the cost of a healthy diet in India, though increasing, is still lower than many comparable economies. However, given the poor income levels in India, a healthy diet is still unaffordable to many.

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Chart 3 | The chart shows the change in the cost of a healthy diet over the years across regions.

Between 2019 (before the COVID-19 pandemic) and 2021, the expense of maintaining a healthy diet increased by almost 9% in Asia — the highest across regions.

Chart 4 | The chart shows the change in the number of people who were unable to afford a healthy diet over the years across regions.

Between 2019 and 2021, Asia followed by Africa recorded the highest growth in the number of people who could not afford a healthy diet. The two continents together made up 92% of the worldwide increase. In Asia, South Asia had the highest number of people (1.4 billion) and the highest share (72%) who could not afford a healthy diet. This rate was nearly double the average for the region. In Africa, Eastern and Western Africa together had the most people (712 million) and the highest share (85%) who could not afford a healthy diet.

Source: World Bank blog titled, “Over 3.1 billion people could not afford a healthy diet in 2021 – an increase of 134 million since the start of COVID-19”, State of Food Security and Nutrition in the World

Also read: Policy changes to make healthy food cheaper are the need of the hour to tackle diabetes epidemic: Expert

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Image used for representational purpose only.
| Photo Credit: Reuters

The wholesale price based inflation remained in the negative territory for the fourth straight month in July at (-)1.36% on easing prices of fuel, even though food articles turned costlier.

The wholesale price index (WPI) based inflation rate has been in the negative since April and was (-)4.12% in June. In July last year it was 14.07%.

Inflation in food articles skyrocketed 14.2% in July against 1.32% in June.

“Decline in the rate of inflation in July, 2023 is primarily contributed by fall in prices of mineral oils, basic metals, chemical & chemical products, textiles and food products,” the commerce and industry ministry said on August 14.

Fuel and power basket inflation eased to (-)12.79% in July from (-)12.63% in June.

In manufactured products, the inflation rate was (-)2.51% as against (-)2.71% in June.

The RBI last week kept interest rates unchanged at 6.5% for the third straight meeting but signalled tighter policy if food prices drive inflation higher.

“The job on inflation is still not done,” RBI Governor Shaktikanta Das had said.

“Inflationary risks persist amidst volatile international food and energy prices, lingering geopolitical tensions and weather-related uncertainties.”

The RBI raised its inflation forecast for the current financial year ending March 2024 to 5.4% from 5.1% earlier, citing pressures from food prices.

The Central bank takes into account retail or consumer price index based inflation for formulating monetary policy. Retail inflation data for July is scheduled to be released later in the day.

A vendor weighs tomatoes for a customer at a vegetable market in Ahmedabad on July 25, 2023.
| Photo Credit: Reuters

India’s retail inflation may have spiked close to or over the 6% upper tolerance threshold of the Reserve Bank of India (RBI) in July, owing to a broad-based uptick in food prices, and could remain sticky in coming months, economists reckon.

This could compel the central bank to stay hawkish and possibly raise its inflation projections for the ongoing July to September quarter (Q2) as well as the full year 2023-24 at its monetary policy review this week, and delay hopes of an interest rate cut.

Also read |Govt stays guarded over prices even as core inflation softens

The RBI’s Monetary Policy Committee (MPC) will meet over three days from August 8 and convey its decisions on Thursday, August 10, while the National Statistical Office will release July’s retail inflation numbers on August 14. The MPC has projected average retail inflation of 5.2% in Q2 and 5.1% for the full year.

Having stayed below the 6% mark for four months in a row, consumer price inflation (CPI) had, however, risen to a three-month high of 4.8% in June owing to a spurt in food prices, particularly, cereals, pulses, milk and tomato prices. This trend firmed up further last month, with tomato prices up almost 176% from a year ago, and tur, rice, salt, milk and pulses rising over 10%, a Bank of Baroda (BOB) report noted.

“We expect CPI to settle around 5.8%. RBI in its coming policy would be continuing with its hawkish pause and might revise its inflation projection for Q2 upwards,” said Dipanwita Mazumdar, economist at Bank of Baroda.

Core inflation may ease

State Bank of India group chief economic adviser Soumya Kanti Ghosh is not as sanguine and expects inflation to hit 6.7% in July, thanks to food inflation, though he expects non-food, non-energy inflation (core inflation) to ease to 5% from 5.1% in June.

Rice prices have spiked the most in the northeast and southern regions, rising 32% and 17%, respectively, with the latter paying the highest price in the country at ₹53.7 per kilogram. Moreover, extreme flooding as well as relatively poor rainfall in some States have affected rice sowing, with the sown area at just 59% of normal area as of July 28. India’s recent non-basmati rice export ban has wreaked havoc for over 140 countries which depend on its supplies, but may bring some relief to consumers, especially in the south, Mr. Ghosh said.

Despite easing core inflation, Nomura economists Sonal Varma and Aurodeep Nandi said the food inflation spike, especially during July-September, would likely result in higher overall inflation this year. “We expect higher food inflation to push headline inflation to 6%-6.5% in July and August, before settling in a 5-6% range over the rest of the fiscal year,” they said.

Mr. Ghosh cautioned that edible oils, whose prices have been subdued in recent months compared to extreme spikes last year after the Russia-Ukraine conflict, could pose fresh pressures. While India has substituted sunflower oil imports from Ukraine with palm oil imports from Malaysia and Indonesia, these could be hit as their crop is likely to be affected by El Niño conditions, he added.

The story so far: On September 9, the Centre instituted a ban on the export of broken rice. Additionally, it mandated an export duty of 20% on rice in husk (paddy or rough), husked (brown rice) and semi-milled or wholly-milled rice. The measures do not affect export of basmati or parboiled rice. The Secretary at the Department of Food and Public Distribution Sudhanshu Pandey stated that the measures would ensure adequate availability of broken rice for consumption by the domestic poultry industry and for other animal feedstock. Additionally, it would sustain production of ethanol that would further assist the successful implementation of the Union government’s Ethanol Blending Programme (EBP). However, the measures may affect countries dependent on Indian food exports in the face of a lost ‘breadbasket’ in Ukraine owing to the Russian conflict.

What does it have to do with inflation?

The lower the supply of a commodity, the higher would be the price of a product, which results in inflationary pressures. The adequacy of rice stocks in the country would ensure that markets do not experience excess demand and thus, trigger an abrupt price rise. For seven consecutive months, inflation has been above the Reserve Bank of India’s 6% tolerability threshold. The Consumer Price Index (CPI), or retail-based inflation, stood at 7% in August this year with rural and urban inflation scaling 7.15% and 6.72% respectively. This was furthered by an uptick of 7.62% in food prices during the same period.

The COVID-19 pandemic also had an impact on India’s previously held surplus. As a reaction to the distresses caused by the pandemic to the vulnerable sections the Union Cabinet had introduced a food security program, called the Pradhan Mantri Garib Kalyan Anna Yojana (PM-GKAY) in March 2020. The scheme provisions an additional 5kg ration per person each month in addition to their normal quota of foodgrains under the National Food Security Act. In March, the scheme was extended for another six months until September 2022.

The Hindu Businessline had reported this week that foodgrain stocks (including rice, wheat and unmilled paddy) in the Food Corporation of India (FCI)’s central pool had dropped 33.5% on a year-over-year basis to 60.11 million tonnes as of September 1 — prompting doubts on the continuation of the scheme. Research analysts at Nomura observe that on the whole, though rice stocks should remain above buffer levels, the current export restrictions may not necessarily improve the demand-supply situation materially, implying, that there remains an upside risk to the price of rice. “As such, we believe there is a risk that further curbs on rice exports could be imposed, particularly in categories still exempted,” it states.

What happened to rice production?

The major rice cultivation season in India is the Kharif season, that entails sowing the crop during June-July and harvesting them in November-December.

It is imperative to note that rice is a water-intensive crop which also requires a hot and humid climate. Thus, it is best suited to regions which have high humidity, prolonged sunshine and an assured supply of water. It is for this reason that the eastern and southern regions of the country, with sustainable humidity and suitable mean temperatures are deemed favourable for the crop. While the two regions are able to grow paddy crops throughout the year, higher rainfall and temperature prompt the northern regions to grow only one crop of rice from May to November. Andhra Pradesh, Telangana, Punjab, Haryana, Chhattisgarh, Odisha, Madhya Pradesh, Tamil Nadu, Maharashtra, Uttar Pradesh and Bihar are among the rice producing States in India.

A perusal of Indian Meteorological Dept’s data, between June 1 and September 14 illustrate that Uttar Pradesh, Jharkhand, Punjab and Bihar have experienced deficient rainfall. The latter refers to rainfall being 20-59% below normal in a particular region. Although West Bengal, the country’s largest producer, has overall experienced a normal rainfall, its major productivity areas such as Nadia, Burdwan and Birbhum have had deficient rainfall. This indicates a potentially lower produce this year.

What are the concerns on ethanol blending?

Ethanol is an agro-based product, mainly produced from molasses, which is a by-product of the sugar industry. The EBP endeavours to blend ethanol with vehicular fuels as a means to combat the use of fossil fuels and in turn, rising pollution. As per the government, sugar-based feed stocks alone would not be able to meet its stipulated target of 20% ethanol blending by 2025.

In the 2018-19 Ethanol Supply Year (ESY), the government had allowed the FCI to sell surplus rice to ethanol plants for fuel production. The idea was to have in place an insurance scheme and an emergency provision for distillers.

However, in the ongoing ESY, because of supply constraints there has been an uptick in the procurement of rice from the FCI. The total ethanol produced from rice lifted from the FCI stood at 26.64 crore litres whereas that from damaged food grains outside the FCI purview stood at 16.36 crore litres. This means that the production accruing from FCI rice has increased 10-fold from the 2.2 crore litres used in a full ESY. At the same time, production from damaged foodgrains stands at half.

Thus, the export ban would endeavour to catch-up with this supply and additionally, unburden the FCI from provisioning to distillers.

What are the likely after-effects of the ban?

Geopolitical tensions between Russia and Ukraine have unsettled global food supply chains. With trade disrupted in the Black Sea region, Bloomberg reported in March that prices of rice are surging because traders are betting it will be an alternative for wheat which is becoming prohibitively expensive.

India accounted for 41% of the total rice exports in the world in 2021 larger than the next four exporters (Thailand, Vietnam, Pakistan and United States) combined.

As for broken rice, the United States Department of Agriculture (USDA) states that India accounted for more than half of the commodity’s global exports in the first half of 2022. As per government figures, between April and August this year, broken rice’s share in the overall rice export mix (of India) was 22.78% compared to 18.89% in FY 2021.

In descending order, China, Senegal, Vietnam, Djibouti and Indonesia are the biggest importers of India’s broken rice.

Senior Executive Director at the All-India Rice Exporters Association Vinod Kumaar Kaul told The Hindu, “Thailand, Vietnam and Pakistan would gain should we happen to lose this market. Once lost, regaining the market would be a task.”

Mr. Kaul pegs the losses to the exporters from the ban to be around ₹5,600 crore for the full year.

THE GIST

On September 9, the Centre instituted a ban on the export of broken rice. Additionally, it mandated an export duty of 20% on rice in husk (paddy or rough), husked (brown rice) and semi-milled or wholly-milled rice. 

In the ongoing Ethanol Supply Year, because of supply constraints there has been an uptick in the procurement of rice from the FCI. The export ban is a means to catch-up with this supply and additionally, unburden the FCI from provisioning to distillers.

With trade disrupted in the Black Sea region, prices of rice are surging because traders are betting it will be an alternative for wheat which is becoming prohibitively expensive. India accounted for 41% of the total rice exports in the world in 2021.