Food Inflation in India May Climb as Government Raises Minimum Crop Prices

Food-price inflation in India, Asia’s third-largest economy, may accelerate after the government raised the prices it pays farmers for food grains and oilseeds, making crops more expensive, economists said.

The minimum prices for monsoon-sown crops including paddy, soybeans and corn were increased to help boost planting, the farm ministry said in New Delhi yesterday. The federal government sets the crop prices to assure farmers’ incomes, while selling subsidized grains and cooking oils to the poor.

An increase in food prices would add to inflationary pressures in India, where the central bank has boosted interest rates nine times since March 2010. Global food prices reached an all-time high in February driven by stronger demand and harvest disruptions, according to a United Nations gauge.

The higher crop prices in India will “raise the floor price of agricultural commodities,” Shubhada Rao, chief economist at Mumbai-based Yes Bank Ltd., said in an interview yesterday. “It will definitely add to food inflation.”

An index measuring wholesale prices of agricultural products advanced 9.01 percent in the week ended May 28 from a year earlier, the trade ministry said yesterday. Overall inflation in India has been above 8 percent for 16 months.

The jump in global food costs has pushed 44 million more people into poverty since June 2010, according to a World Bank estimate. Higher prices helped spark the riots across northern Africathis year, toppling Tunisian President Zine El Abidine.

Policy Concern

Food costs in India have been a concern for the last two years, Reserve Bank of India Deputy Governor Subir Gokarn said on June 2. Inflation needs to be curbed to boost economic growth, Reserve Bank Governor Duvvuri Subbarao said on May 18.

India, the world’s second-biggest rice producer, increased the minimum purchase price of the so-called common variety of raw rice to 1,080 rupees ($24) per 100 kilograms (220 pounds), from 1,000 rupees, the farm ministry said. The price of soybeans was raised 17.4 percent to 1,690 rupees per 100 kilograms and for peanuts by the same amount to 2,700 rupees.

India’s food inflation may accelerate from October when new crops, affected by higher farming costs and rising oil prices, arrive in the market, Ashok Gulati, chairman of the commission that recommends minimum prices to the government, said in May.

Monsoon-sown crops are planted from this month, with harvesting starting in October. The annual weather pattern, which accounts for more than 70 percent on India’s rainfall, may be 98 percent of the average, a level deemed normal, the Indian Meteorological Department said in April.

“Although the hike in minimum support price is valid for rice and wheat for procurement purposes, it serves as a benchmark for other crops, feeding inflation,” said Madan Sabnavis, chief economist at Mumbai-based CARE Ratings. “This year, the rains are expected to be good and the crop is likely to be better. But there will be no relief for inflation as on one hand the government tries to protect the consumers and on the other hand, the farmers.”....