Has the RBI got its inflation outlook wrong?

Forecasting inflation and providing inflation outlook is seldom easy. For an economy like India, whose markets are increasingly integrating with the global market through the trade and investment route, it is even more harder.

There are numerous global and domestic factors that weigh on markets, in general, and on prices, in particular. Some of the key drivers include economic growth, geopolitics (impact on crude oil), monetary policy, currency gyrations and of course weather. The role of investment or speculative capital in exerting an exaggerated or disproportionately larger impact on prices is also well known.

Supply constraints

It is for this reason that the Reserve Bank of India (RBI) Governor’s statement on May 22 assumes added importance. Admittedly, the RBI governor said that the inflation outlook has become complicated because only partial information was available on consumer price index and from that incomplete data it appeared that in April food inflation surged by 8.6 per cent as supply disruption took their toll. Prices of vegetables, pulses, edible oil, milk and cereals emerged as pressure points, he added.

Providing an outlook against this backdrop, the MPC assessed that the inflation outlook was uncertain. The supply shock to food prices in April may show persistence over the next few months, depending on the state of lockdown and the time taken to restore supply chains after relaxation, he asserted.

However, what surprised this writer was the governor’s statement: “Among the pressure points, the elevated level of pulses inflation is worrisome and warrants timely and swift supply management interventions including reappraisal of import duties”.

Two critical aspects are worth bearing in mind. One is on production and the other, on retail distribution of pulses. In March and April, the country harvested a record rabi pulse crop of 15 million tonnes (mt)including 10.9 mt of chana or chickpea, according to Agriculture Ministry. Nafed, the government agency, has pulse inventory in excess of 2.5 mt. In other words, there is no shortage of pulses at the national level.

In April, retail prices of pulses spiked following national lockdown announced on March 25, closure of dal mills and disruption to supply of milled pulses for human consumption at the retail level. The price spike in April was an aberration given the lockdown situation.

Pulses rule stable

To put it bluntly, retailers took undue advantage of the scramble among household consumers to stock up large quantities to meet any unforeseen eventuality. However, following the government intervention and clarification, dal mills started to revive their activities gradually by the third week of April.

Ironically, in April, even though retail price of pulses showed a spike, farm-gate and wholesale prices of various pulses including chana/chickpea/gram and tur/arhar/pigeon pea ruled between 10 and 20 per cent below the specified minimum support price, and they continue to be so even now.

The country currently carries sufficient inventory of pulses to meet the needs of consumers. In fact, the government has included pulses as part of free ration for vulnerable families which will help reduce the inventory burden. So, while the governor’s call for swift supply management is right, his demand of reappraisal of import duty on pulses is unwarranted and unjustified.

Interestingly, immediately after the governor’s speech, a false hope was kindled among all pulse supplying countries that India would reduce the Customs duty on pulses (60 per cent on chickpea and 30 per cent on lentil). Overseas suppliers have actually raised their offer rates hoping India would be in the market soon. Such are the hazards of making a loose statement, however unintended it might be.

One does not expect the RBI governor to keep track of pulses prices, but it is critical that he questions every statement written by his speech writer. The country has harvested record crops of rice, wheat and pulses. Sugar availability is sufficient. In case of edible oil, imports can be organised in less than 15 days. Globally, crude oil prices are relatively low (Brent $35 a barrel). So, in a 2-3 month horizon, there is little fear of food inflation rearing its head.

The author is a policy commentator and agribusiness specialist. Views are personal.