The Hindu Business Line : Inflation will continue to haunt in second-half too

Mumbai, July 25 Now that the political dust is beginning to slowly settle down, the Government’s priority will have to be inflation control. The Prime Minister himself asserted in no uncertain terms, after the trust vote win. Will the second half of the year be any better than the first half?

The first half of 2008 saw the Government go completely in the defensive in its fight against price rise. Fiscal, monetary and administrative measures were unleashed from time to time; but their impact was marginal, if any. The rate of inflation climbed week after week, reaching 11.9 per cent according to the last published information, threatening to breach the 12 per cent mark.

Crucial Development

In July, politics, rather than economics, took over to rule the markets. Political uncertainty, easily combined with volatile market conditions both within and outside the country, was threatening investor interest. The focus is now expected to shift back to the aam aadmi. A crucial development this month that is yet to sink into the market psyche is emerging mid-season drought conditions in Western and Southern parts of the country, as of now.

The 2008 kharif season agricultural production is facing the prospect of a set back. Poor farm output is the last thing this country can afford at this point of time. Preliminary indications point to lower crop of sugarcane, cotton, oilseeds, pulses and coarse cereals. In other words, overall, the 2008 kharif output is likely to be considerably lower than kharif 2007. How much lower is something that can be estimated perhaps four weeks from now. The Government has claimed record harvests of various crops in 2007; yet, it failed to contain price rise.

One can well imagine what could happen to prices in the second half of the year, if we take lower output of major field crops as a given. In sum, the price situation is turning, slowly but surely, potentially explosive.

Cotton exports

Coming to specifics, cotton output is expected to fall considerably below the record 315-lakh bales size of 2007. This is sure to exert upward pressure on market prices even at the beginning of the season in October/November. Lower crop and higher prices combine to raise the possibility of a restriction on cotton exports out of the country, if not an outright ban.

The global cotton market is already enjoying a modest bull run. Restricted exports from India can exacerbate the global price rise. It is already known that sugarcane acreage has declined from 52-lakh hectares in 2007 to 43-lakh hectares in 2008 and that sugar production would decline by about a fifth to 220-230-lakh tonnes.

Sugar prices from now on have a strong upside bias. Prices first reaching and then breaching Rs 2,000 a quintal is on the cards. Expect sugar exports to be highly restricted or even banned. Given the emerging status of oilseeds crops, particularly the setback to groundnut and sesame seeds (high oil content crops), the country’s edible oil import requirements are sure to expand further.

Incremental imports may be around 10-lakh tonnes, taking the total for the oil year 2008-09 to a new high of 60-lakh tonnes. One can expect restrictions on oilmeals/extractions export, and withdrawal of all export incentives. Lower grains, oilseeds, sugarcane and fibres crops will mean tightening availability and rising dependence on imports. A weak rupee, with little prospect of a bounce back, means expensive imports.

Food Inflation

Additional Indian demand for food products such as vegetable oils and pulses is sure to send world prices higher. Food inflation is most unlikely to be tamed by the Government. The existing restrictions on exports and domestic trade are sure to continue. Export of grains such as rice (non-basmati), wheat, maize and pulses already stands banned; and is unlikely to be lifted anytime soon. If anything, more may be added to the banned list. Earlier hopes of a favourable review of the ban on futures trading in select commodities are likely to be belied.

The Government would be in no mood to exacerbate the already explosive price situation. Expect further tightening of storage and other restrictions. With elections to various State Governments and the General Elections itself round the corner, the Government would be even more desperate to be seen supporting the aam aadmi and doing everything for his welfare. This will not be possible unless subsidised food is actually delivered to the really needy. Without a renewed focus on public distribution system, there is little hope for the common man to have relief from high food prices.

There is going to be greater political risk for the Government in the emerging food price situation, which would translate to policy risk for the commodity-based trade and industry. The commodity businesses should be ready to face severe restrictions. In case of non-agri commodities, the global market is not exactly favourable. Yes, crude market is beginning to correct down, with the last heard price at NYMEX slightly below $127 a barrel.

But the market fundamentals are still tight. This is a phase of consolidation. Relief, if any, from high crude prices, will be marginal. The UPA Government may have won the trust vote in Parliament. But it may have to strain every nerve to win the trust of the people in the coming months. It is not going to be easy as supply side issues are likely to continue to haunt the Government with even greater ferocity.

Related Stories:
Kharif crops may be hit in 6 States on deficient rains
Step-up in kharif sowing augurs hope on inflation
Inflation: Cause for concern, not panic

More Stories on : Economy | Commodities | Commodity Commentary

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