Rising Wheat Prices Could Upset Inflation Control Policy Math

The government as well as the Reserve Bank of India (RBI) is hopeful that the next financial year, India’s inflation woes would cool off. After a year of struggling to tame the beast called price rise, larger global macro-economic indicators were just beginning to provide relief to policymakers on the inflation path. But a warmer-than-expected February and the resulting impact on wheat harvest could mean bad news for inflation.

After falling below the RBI-mandated upper tolerance limit of 6 per cent for two months, Consumer Price Index (CPI)-based inflation spiked again in January reaching to 6.52 per cent. The spike in inflation was largely driven by rising food prices that make up 40 per cent of the CPI basket. Food inflation in January was 5.94 per cent compared to 4.19 per cent a month ago. Food inflation has remained elevated for several months now. Inflation in food basket in September was 8.6 per cent, in October 7 per cent, and cooling down to 4.7 per cent in November. In that, inflation in cereals has been particularly worrying as inflation rose from 11.5 per cent in September, to 12.1 per cent in October, 13 per cent in November, 13.8 per cent December, and 16.1 per cent in January.

Climate Change And Wheat Production

The rising cereal prices, of which wheat is a component, means that the pinch would be felt by the lower- and middle-income groups. Wheat is a staple across India and warmer February adversely impacts quality of wheat. The India Meteorological Department recently issued an advisory on warmer day temperatures negatively impacting wheat and other standing crops in the north Indian states. In the February 2-8 week, the highest temperature in wheat-growing states, like Madhya Pradesh, was above the average temperature of the last seven years. This is not a one-off phenomenon. Last year too, a heat wave in March damaged wheat yield across central and north Indian states. The heat set in unusually early last year and even earlier this year.

“The weather conditions are something that still is not being accounted for in any of the policy discussions. There is a crisis building up in the agricultural sector. The weather will impact production as well as the prices of commodities like wheat. Food prices will continue to be sticky,” says NR Bhanumurthy, vice chancellor, BR Ambedkar School of Economics University, Bengaluru.

That there is a lack of policy focus on climate change and its impact on agriculture, could be seen in this year’s Union Budget too, which focuses on fixing medium-term growth. But neither the RBI nor the government has yet addressed how two consecutive years wheat output was impacted due to climatic conditions, thereby resulting in price rise. “All is not well in the agriculture and rural sector. The indications point towards a crisis in the agriculture sector. There is the prediction of La Nina effect and also due to expected reduction in all the inputs (land, labour as well as capital),” Bhanumurthy said.

Last Year’s Woes Back

As far as production is concerned, the agriculture ministry has said wheat production in the current season is expected to be 112 million tonnes, up by 4.44 million tonnes from last year. But last year’s heat wave in March resulted in a decline in government’s wheat buffer as high temperatures shrivelled the wheat grains resulting in poor output. In the 2021-22 crop season, 106.84 million tonnes of wheat was produced, less than 109.59 million tonnes in 2021. This impacted the government’s procurement policy as it was at a 15-year low. Farmers chose to sell their output at a higher price in the market than to the government. As a result of low procurement, the government was forced to revise wheat allocation under the Pradhan Mantri Garib Kalyan Ann Yojana, replacing wheat with rice in 11 states. Domestic wheat prices in January reached a record high of Rs 32,500 per tonne, far above the government-fixed buying price of Rs 21,250.

“Even last year we saw the wheat crop getting affected by the extended heat in north India. That situation is set to be replicated this year as well. In case of wheat, even a decline in output by, say, 1 million tonne, has the potential of increase prices right away. Cereal prices will continue to increase in the next financial year. It will definitely affect overall inflation. In such a situation, there is always a case of states offering higher MSP (minimum support price) in order to make farmers happy. And with elections coming up in states like Madhya Pradesh, there could be a tendency to give another bonus by the state government. Therefore, there is every reason for us to believe that the price will go up,” said Madan Sabnavis, chief economist, Bank of Baroda.

While the RBI has maintained a tight rate regime to control inflation, it is perhaps time to look at how climate now has the potential to upset all traditional rules of controlling inflation. The second consecutive year of early heat conditions coupled with absolutely low to no rainfall experienced in December last year and January this year, means that the pinch would be felt by the large majority of Indian households that consume wheat as staple.