- Written by Nikhil Inamdar
- BBC News, Mumbai
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Onion prices have risen in India
Erratic weather conditions – including the driest August in more than a century – have sent food prices soaring by more than 11% in India, a major player in global agricultural trade.
As tomato prices began to decline, onion prices rose by a quarter since June in the local market. The legumes used to make the humble lentil soup are 20% more expensive than they were at the beginning of the year.
Some economists say India has a “curry problem”, with the cost of the average vegetarian meal jumping by a third in July alone.
With some key state elections looming this year and a major general election next summer, the Indian government has been quick to act, launching a number of measures to tame food inflation.
After imposing a wheat ban in May 2022, India announced a sudden halt to non-basmati white rice exports last month. Recently, the Finance Ministry imposed a 40% duty on onions to discourage exports and improve domestic supplies.
With sugar production expected to decline this year, “the likelihood of a ban on sugar exports has also increased,” according to Rajni Sinha, chief economist at CareEdge Group.
Analysts say the government could intensify its response with further measures in the future. For example, since successive restrictions on rice exports have not yet reduced domestic rice price inflation, “the government could seek to impose a more comprehensive ban,” global brokerage Nomura said in a recent note.
So, with its aggressive defense of domestic prices, does India risk exporting food inflation to the world?
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Purchase limits were imposed on rice at a grocery store in Canada in July following an export ban imposed by India
The International Food Policy Research Institute (IFPRI) believes this to be the case, especially with regard to rice, sugar and onions. Over the past decade, India has emerged as the world’s largest exporter of rice – with a 40% market share – and the second-largest exporter of sugar and onions.
The UN Food and Agriculture Organization’s (FAO) rice price index jumped 2.8% in July – its highest level since September 2011 – driven mostly by increases in prices of the Indica variety of rice whose exports India has banned. This exacerbated “upward pressure” on rice prices from other regions, the FAO said.
“Since the ban was announced late last month, Thai rice prices have risen by 20%,” Joseph Glauber, a senior researcher at the International Food Policy Research Institute, told the BBC.
The impact – especially on the world’s poor – could be devastating, with food insecurity deteriorating in 18 “hunger hotspots” identified by the Food and Agriculture Organization and the United Nations World Food Programme.
Rice is part of the staple diet that accounts for a large share of calorie consumption for millions across Asia and Africa. India is the main supplier to these markets.
Forty-two countries in Asia and sub-Saharan Africa get 50% of their total imports from India, rising to 80% in some countries according to the International Food Policy Research Institute, and their share cannot be “easily replaced by imports from other large exporting countries such as India.” Vietnam, Thailand or Pakistan.”
Upali Galketi, chief economist at the World Bank, says rising global food prices could also have other effects in these countries, such as keeping food import bills high, leading to the use of precious foreign currencies, “thus exacerbating balance of payments problems and contributing to Inflation. Department of Markets and Trade of the Food and Agriculture Organization.
But we should not blame the increase in global food prices on India’s actions alone. Another major contributing factor was the ending of the Black Sea Grain Initiative following the Russian invasion of Ukraine and extreme weather conditions around the world.
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Food prices have risen by over 11% in India
The combination of these market dynamics “resulted in a reversal of the downward trend in global food prices observed since the middle of last year,” Galketti told the BBC.
Global food prices have reached historic highs despite a slowdown in many parts of the world such as China. This affects global food prices due to weak demand from these places.
The World Bank expects the average food price index to decline in 2023 compared to 2022, driven by lower oil and grain prices. But analysts say the future path of prices will depend on the impact of the El Niño weather phenomenon – something that could have far-reaching effects and put further pressure on food markets.
Amid the uncertainty, calls for India to scrap its ban on exports of key commodities have come from various quarters, including the International Monetary Fund.
Besides contributing to global food inflation, “the export ban has other negative externalities, such as damaging India’s reputation as a reliable supplier and preventing farmers from benefiting from globally remunerative prices,” say analysts at Nomura Bank.
“Trade restrictions may also exacerbate boom-bust price cycles. For example, high inflation in pulses in 2015-16 led India to significantly increase its imports, but a normal monsoon and strong domestic production in subsequent years led to a glut of Supply and prices collapsed into deflation. Land during 2017-18.”
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Some food outlets in India have recently removed tomatoes from their menu
Others like Glauber warn that “importers may choose to find other, more reliable partners if the benefits of supplier diversification outweigh price considerations.”
But according to the Food and Agriculture Organization, the more significant threat comes from the possibility that more countries will resort to export restrictions, which would “undermine confidence in the global trading system.”
However, some say realpolitik and a determination to increase food self-sufficiency will trump these other considerations in India, especially during a politically sensitive period.
In the past, high prices for crops such as onions have led to electoral defeats in India; Add to this the already volatile consumption recovery. The rising cost of food, which constitutes a significant portion of the average Indian’s expenses, could erode discretionary income before the upcoming holiday season, further hampering this recovery.
The RBI has already raised interest rates six times and can do little more to control food inflation since it is a supply-side issue.
So the government has little ammunition except to impose trade restrictions.
“All countries are currently focusing on controlling inflation in their economies,” says Ms. Sinha. “I would say that India should also look after its own interests before it starts worrying about global inflation.”
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