Wed, Nov 11, 2015 - Page 15 News List

Rising food prices likely to hit rural India next year

AT A LOSS:With the central government unable to cope with the first back-to-back drought in 30 years, Indian villagers have seen their yearly incomes almost halved

Reuters, MUMBAI

An farmer walks holding a hoe in fields on the outskirts of Amritsar, India, on Wednesday last week.

Photo: EPA

India’s villages face a sharp spike in food prices next year, as a second year of drought drives up the cost of ingredients such as sugar and milk, and poor transport infrastructure stops falling global prices from reaching rural areas.

India’s first back-to-back drought in three decades also complicates government spending calculations as Indian Prime Minister Narendra Modi tries to prune a subsidy regime that has long propped up the rural economy and he can ill afford to alienate rural voters after a bruising weekend electoral defeat in the northeastern sate of Bihar.

It is bad news for the central bank, too, which faces a conundrum achieving its 4 percent inflation target for the medium term as levels diverge in town and country, and infrastructure development would take years to fix it.

India’s overall retail inflation eased to 4.41 percent in September, helped by falling commodity prices, but rural inflation was at 5.05 percent, mostly due to food prices.

That, some analysts argue, could worsen, despite the dampening effect of lower wages and sluggish growth in the agricultural sector.

“The impact of this year’s drought would cut supplies of sugar, milk and vegetables, which the market hasn’t factored in yet fully,” said Harish Galipelli, head of commodities and currencies at Inditrade Derivatives and Commodities.

“The first half [of next year] would be more painful than the second half,” he said.

While urban dwellers have seen some cheaper imported food products, benefiting from global deflation, that has not filtered through to rural areas, given poor roads, rail and a lack of storage facilities for perishable goods.

Prices of vegetables like onions, tomatoes and potatoes have already been rising, with some staples up as much as 20 percent in a month. Palm oil prices have also climbed in the last two months, while milk prices have risen by 10 percent.

India is to release monthly retail inflation data for last month tomorrow.

There is little sign of relief.

Indian sugar futures are up by a quarter since a late July low and producers say lower output because of the drought would push them up further next year.

Edible oil prices in India, which meets nearly 70 percent of demand through imports, are also likely to rise, given scant rainfall in palm oil-producing countries.

Meanwhile, scarcity of fodder and water is expected to hit local milk production from February.

“The country’s milk production could drop by 5 to 7 percent next year. The reduction would obviously allow prices to rise,” an official with the Maharashtra state milk cooperative said.

Food accounts for more than 50 percent of rural consumer price inflation in India, compared with a third of urban inflation, while categories like fuel, which has seen a considerable price drop, has a much smaller impact in rural areas, where families use firewood or biogas from manure.

The rural economy contributes around 50 percent of Indian GDP and is already showing signs of strain as government cuts the once-generous subsidies that shielded farmers and villagers. Motorbike and tractor sales were weak last month, traditionally an auspicious time to buy.

Two-wheeler sales rose just 0.36 percent in April to October compared with 16.4 percent growth in the same period a year ago.

“My income dropped nearly 50 percent due to drought,” said farmer Sunil Gujar, 42, from the interior of the western state of Maharashtra.

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