India's Cereal Paradox: Record Harvests, Soaring Inflation
In its June 2024 Monetary Policy Committee meeting, the Reserve Bank of India (RBI) has maintained its policy interest rate and stance, citing persistent inflation as the primary concern. The Consumer Price Index (CPI) remains elevated, with food inflation being a major contributor. Food prices in India rose by 8.7% from the previous year in April 2024.
Interestingly, cereals, a principal component within the food basket, present a concerning paradox. While rice production has grown from 124 million tonnes to 135 million tonnes, and wheat from 109 million tonnes to 112 million tonnes over the last three years, cereal inflation has remained stubbornly upwards of 10% in 2023. One factor contributing to this puzzling trend is the government's increasing procurement of cereals, surpassing the requirements under the National Food Security Act (NFSA). For instance, in the current fiscal year, the government has already procured 19.6 million tonnes of wheat, exceeding the annual NFSA demand of 18.5 million tonnes.
Excess procurement leads to unintentional hoarding effects and potential wastage over time. Storing cereals for extended periods can result in quality deterioration due to moisture, pests, and other factors, leading to significant wastage. Besides, it is evident that many ration-eligible families are not consuming their full entitlement, preferring to purchase from the market for better quality and variety. This further contributes to the government's growing stockpile of grains.
While government procurement (at MSP prices) plays a crucial role in supporting farmer incomes, it has led to hoarding, wastage, and an accumulating idle stockpile of grains, which is contributing to higher food inflation. A solution lies in selling the procured grains back into the market at prevailing prices. This move could help cool off inflation and ensure better utilization of resources. The government's recent initiative to sell grains directly to consumers under the "Bharat" brand is a step in the right direction, but scaling this D2C model may prove challenging.
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Integrating into existing supply chains and dealer networks could be a more efficient and effective approach to distributing excess cereals. By partnering with established players, the government can maximize reach and optimize resources. Alternatively, encouraging private sector participation in the food grain ecosystem to distribute excess cereals back into the market could further enhance efficiency and competitiveness.