Bumper Crop Paradox: Rising Cereal Prices

The Paradox of Abundant Harvests and Soaring Cereal Prices

Despite official production statistics indicating an ample grain supply in the country, cereal prices in India continue to rise. Cereal inflation, as measured by the official Consumer Price Index (CPI), has remained in double digits year-on-year since September 2022. This article explores the complex factors contributing to this paradox and proposes potential solutions to mitigate the issue.

The National Food Security Act (NFSA) 2013

The NFSA was enacted to shift the approach to food security from welfare to a rights-based model. It legally entitles a significant portion of the population to receive subsidized food grains under the Targeted Public Distribution System (PDS), covering about two-thirds of the population. Additionally, it promotes women's empowerment by mandating the eldest woman in a household to be the head for issuing ration cards.

Recent Changes in NFSA Entitlement

Starting from January 2023, NFSA entitlements were reverted to the original 5 kg/person/month levels, which were in place prior to April 2020. Consequently, the same ration cardholders must now purchase rice and wheat from the open market, subject to double-digit cereal inflation.

Current Cereal Inflation Scenario

Cereal and products inflation currently stands at 12.71%, contributing significantly to CPI inflation. Wheat and rice inflation rates are at 12.37% and 11.78%, respectively. The retail prices of rice and wheat have risen over the past year, further exacerbating the situation.

Contrast in Grain Availability: Pre and Post-Covid

During the three post-Covid financial years (2020-21, 2021-22, and 2022-23), rice and wheat offtake exceeded the average lifting of 62.5 million tonnes in the first seven years after NFSA implementation. The PDS played a crucial role in ensuring food security during the pandemic, with record exports of rice and wheat, signifying an era of abundance.

Depleting Government Grain Stocks and Its Impact

Depleting rice and wheat stocks in government warehouses forced the central government to cease issuing an additional 5 kg of free grain per month to NFSA beneficiaries from January. State governments, such as Karnataka, have had to provide cash instead of the promised extra 5 kg of free rice.

Government Measures to Address Cereal Inflation

To address cereal inflation, the government implemented measures such as a wheat export ban, stock limits on traders and retailers, and rice export restrictions. These actions are aimed at improving domestic grain availability and curbing hoarding.

The Paradox of Bumper Crop and Rising Cereal Prices

Despite an 11.2 million ton increase in rice output and a 3.2 million ton rise in wheat production from 2020-21 to 2022-23, higher production hasn't translated into increased procurement. Government grain purchases, particularly for wheat, have declined. Even after accounting for procurement and exports, the domestic market supply of rice and wheat has seemingly increased over the past two years. This raises questions about why cereal prices remain high.

Proposed Solutions to Tame Wheat and Rice Inflation

1. Reducing Import Duties: The government could consider reducing the import duty on wheat from 40% to a lower rate like 10% to increase supply.

2. Unloading Excess Rice Stocks: Excess rice stocks could be released into the open market at lower prices than those set by the Food Corporation of India (FCI).

3. Revision of CPI Weights: Updating the weights for food and beverages in the CPI basket to reflect current consumption patterns, as Engel's law suggests that people spend less on food with rising per capita income.

Conclusion

The paradox of abundant grain production and soaring cereal prices in India requires urgent attention. Government estimates of record production do not align with the persistent double-digit cereal inflation. To address this issue and bring cereal inflation under control, India should adopt effective policies for food products promptly. This could help contain CPI inflation within 6%, providing much-needed relief to consumers.

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