Food prices soar, forcing the Indian government to improve food supply

Due to uneven rainfall, sparse precipitation, and a general increase in basic food prices, India's annual retail inflation rate in July reached a 15-month high of 7.44%, with the food price inflation rate soaring to an 11.5% high not seen in three and a half years. The rapid surge in food prices has compelled the government of Prime Minister Narendra Modi to take swift action by increasing food supplies to alleviate the pressure of food inflation, aiming to avoid strong opposition from voters in the upcoming elections. Two Indian government sources revealed that to ease the difficulties of low-income consumers, the government is considering extending a free food program set to end in December. It is expected that the food subsidy for the fiscal year 2023/24 will cost the government 1.97 trillion rupees ($23.83 billion), and the expansion of the free food program could further increase government expenditure on food subsidies. By leveraging its distribution network, the Indian government has intensified the subsidized sale of vegetables, particularly onions and tomatoes, while releasing wheat and sugar reserves to the market to curb the soaring food prices. Government sources say these subsidy measures could cumulatively cost the government over $12 billion. Recently, the Indian government banned sugar exports for the first time in seven years, following a rice export ban last month. Through further food export bans, the government aims to provide more food supplies to the domestic market. However, India's food export ban not only escalates food prices in other major countries and economies but also hampers efforts by central banks worldwide, including the Federal Reserve and the European Central Bank, to lower inflation. Another government source, who wished to remain anonymous, stated that compared to perishable foods, the government is more concerned about grains and legumes, which hold the most weight in consumer food baskets. Although the government might aim to mitigate the impact of its policies on both domestic and international markets, it is more focused on the inflationary and electoral pressures caused by soaring domestic food prices amid inflation, especially in food prices. Gaura Sen Gupta, an economist at the economics research department of IDFC First Bank, noted that although the government's interventions have somewhat slowed the month-over-month increase in food prices in August, inadequate rainfall still poses a threat to India's food supply and prices. Following higher-than-average rainfall in July, the first three weeks of August experienced rare drought conditions, affecting the supply and prices of kitchen essentials such as grains, vegetables, sugar, spices, meat, and dairy products. Harish Galipelli, director of trading company ILA Commodities India Pvt Ltd., emphasized that the crops did not receive the required rainfall when it was most needed, briefly relieving pressure on India's food supply. Tomato prices have soared to record levels, forcing fast-food chains like McDonald's and Subway to temporarily remove tomatoes from their menus and leading Indian families to cut back on expenses and reduce their demand for tomatoes. A farm worker from Uttar Pradesh, Mohammad Siraj, stated that he hasn't purchased tomatoes for two months, as rising food prices forced him to decrease his demand for tomatoes and legumes. With the El Niño phenomenon highly likely to continue from December 2023 to February 2024, the uncertainty around the prospects for summer and winter crops has increased. Indian food exporters mentioned that some rice-growing areas in northern India were flooded due to unstable rainfall in July, severely affecting India's rice crops. Now, rice production in southern and eastern India is also threatened by drought conditions. Currently, the Indian government is attempting to increase legume supplies by importing, but the available supplies from exporting countries like Australia, Mozambique, Myanmar, and Tanzania are limited. Legume trader Nitin Kalantri pointed out that due to drought reducing overall yields, legume prices are likely to remain high for the next year. Ashok Jain, chairman of the Bombay Sugar Merchants Association, predicts a significant rise in sugar prices in India owing to increased demand during the upcoming religious festival season. Furthermore, the future supply of sugar in India faces immense uncertainty due to the impact of the El Niño phenomenon.