He discussed the challenges surrounding food inflation, emphasising the volatility of fresh vegetable prices, which are difficult to control due to weather dependency and limited trade options.
Chand suggested expanding the vegetable index beyond tomatoes, onions, and potatoes to better reflect seasonal variations. Despite concerns, he believes the inflation spike is temporary and expects food prices to stabilize in the coming months.
Below is the verbatim transcript of the interview.
Q: The prime reason for my requesting the interview is the way in which the consumer price index (CPI) numbers have come out for September. It has jumped to 5.5% and the prime reason is the rise in food inflation. Year on year (YoY) rise is 9.2% and even month on month (MoM), cereals, pulses, and of course, vegetables have risen a lot. Would you worry that this food inflation can persist?
A: Last month, it was less than 5.6% and all projections work that it will be less than 6% but we have one component on which there is no control, and that component is of fresh vegetables. First of all, you cannot have buffer stock kind of thing for vegetables.
Secondly, we do not have trade option for that. And thirdly, the taste and preferences of Indian consumers are so strong for fresh fruit and vegetable that they are not willing to use processed product as a substitute. So these are the reasons, and they are highly vulnerable to weather related things.
I suggested to Reserve Bank of India (RBI) because they consult me every two months before Monetary Policy Committee (MPC) meeting that right now vegetable index is entirely based on this TOP – tomato, onion and potatoes.
I told them that you should enlarge this number to include other vegetable may be season wise we need to do that. But it happened in case of vegetable.
In fact, if you look at data for last year, July and August, the tomato price had crossed ₹100 but this year it happened in the late September and early October. It is going out of control. And it is not that on the ground, you do not see response. If you look at area under these vegetables, it is rising. So farmers are responding to high prices of vegetables, and they are also even though they know there is volatility, today’s farmer, most of them are not risk averse. They are risk lover. They want to take that chance. So it is happening.
I think whatever need to be done from government side, like there is a committee of ministers, they take cognizance of this every two months. RBI take cognizance of that, and committee of Secretary meet every fortnight to take stock of things. So some effort is made.
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Like if you go to Safal outlets, you will find that the price there will be 30-40% lower than what it is in the open market. So I would say that the only solution in this kind of thing is active intervention, so that one component that whenever there is a genuine shortage, it is exploited by middle man. It is not that they then do not exploit it. So then they try to exploit the situation. So that component can be checked. And regarding your question, is it going to persist for long time – I do not think it is going to persist.
Q: Even the Reserve Bank in the monetary policy said we have to see through this hump. So their expectation is it’s only maybe a month or two. But the worry is, yes, the vegetable prices have risen 3.5% MoM and 35% YoY. But cereals and pulses also have risen about 0.7% MoM, or 1% MoM. Now, one thought that because the rains were bountiful, in fact, they were higher than the long period average, cereals and pulses would have come under control. They have accentuated.
A: In case of cereals, much of what you will watch happening in the market is the translation of what we do to MSP. If we are increasing MSP by 6-5% and some little factor adding from market make it to 8-9% and the MSP announcement is made in advance, you do not know whether production will turn out to be better or not.
So in a way, you get into a spiral that you do not project this kind of very favorable effect of monsoon. I have never seen in the history of Commission for Agricultural Costs & Prices (CACP) that you have even reduced price by very small amount from a high level previous years. So if because of shortage, price MSP is given raise in one year that become a way for further rise in next years. And now we have a new formula, A2+FLx50%, I am not criticizing it, but that formula has led to detachment between what would be open market price and what is MSP in most cases, not in all cases
So you just find that earlier this authority of commission to take cognizance of what is happening in the country to demand and supply what is happening in global market, taking into consideration those kind of things, and based on which they used to give higher or lower margin. That is not now in the hand of CACP. It has now become more or less mechanical, formulaic exercise and as I mentioned – this is very serious point I am making that if your A2+FL multiplied by 1.5 is not close to what will be open market price, then you will find that announcement of MSP bill keep creating inflation.
Q: So the one more question before I come to the overall expectation – oil seeds, because of the rise in import duties, maybe we have seen a 2.5% rise MoM, YoY it is not much, because last year prices were still elevated. But the MoM rise is a little troubling. You think that is just because of the duty, and it will plateau?
A: Even at international level, edible oil prices after falling for long period of 7-8 months have increased to some extent which I feel is a correction. But since that correction was to happen, and in case of soya bean was coming into market, and the farmers were getting price lower than MSP. Again, I would say that now this MSP has become a norm. I have written on it that I am not against MSP becoming something which is justified, which farmer must get, provided this MSP is based on the judgment of a authority that this farmer must get this thing. Now it is based on a formula.
This is my personal view. I am in the government. It is difficult, but I can now confess to you that even when this was adopted, I submitted a note that this is likely to create this kind of situation.
Now we have done it. We cannot reverse that process, and I am sensitive to that farmer should get better price. Our 80-90% farmer are small and marginal so many kind of things. In this kind of thing situation, ultimately we have to move towards a situation where we protect income of the farmers, but do not distort market price. It is doable. China is doing it. USA is doing it. Europe is doing it. They are doing it. They are going for – like China, they need procurement. They go for need based procurement. We have to run PDS and we need some for buffer stock. So total rice and wheat, we procure 50 million tonne, but now it is open ended because of MSP.
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We should move ultimately toward the system of Bhavantar Bhugtan Yojana, or deficiency price payment to avoid distortion in market price. The reason and the consequence of this distortion are going to become heavier and heavier in future. Now we are facing inflation only.
The second consequence will be when your home prices are so high, your export will be affected. And India is moving towards a situation where surplus are expected to rise, so that will become the second victim of this.
So I think there is now a need to balance between interest of producer and consumer. We need to raise income of the farmers. I support that, but we have to come out with new instrument for doing it. We should see that market distortion should be avoided that are known to be costly for other sectors of economy.
Q: It is a more near term question, not the larger policy that you are raising. Do you think that by December or next quarter, food inflation will come down?
A: I feel that what we have witnessed this month is an abnormality. It will definitely, this is my assessment, come down.
Q: Then perhaps the pain of the high inflation is short lived, at least in terms of the headline inflation.
A: But it should also lead to realization that government, even they just look at my note at that time, they wanted to support farmers, so they said, okay, we will just accept this for sake of farmer. We want to promote this sector. So that thing has happened after we adopted this kind of thing, you see the increase in income of farmers, my paper has come agrarian distress. You are not having that kind of situation, but now we need to work on the instrument through which we ensure rise in income of the farmers.
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