India sells rice reserves to curb inflation

Indians sip tea sold by a wayside vendor in the morning in Allahabad, India. Photo / AP

India will offload about a quarter of its rice stockpiles and ease restrictions on selling fruits and vegetables to stem Asia's second-fastest inflation as a weak monsoon threatens to curb crop output.

Prime Minister Narendra Modi's administration will sell 5 million tons of rice from central reserves at subsidised rates as soon as possible, Food Minister Ram Vilas Paswan told reporters in New Delhi this week.

It will also help states import pulses and cooking oils if needed, and fix minimum export prices for potatoes to discourage overseas sales, Finance Minister Arun Jaitley said separately.

"In light of the forecast of a below-normal monsoon, some hoarding seems to have started," Jaitley told reporters on Tuesday after a meeting to discuss ways to curb inflation. "We will ask states to crack down on hoarders firmly. The steps are being taken in anticipation of further price rises."

Modi's government faces pressure to curb quickening inflation several weeks after taking power in a nation where about 70 per cent of the population lives on less than $2 a day.

Wholesale price inflation accelerated to the fastest pace in five months in May and consumer prices rose 8.28 per cent.

"As a first step, this looks very sensible," Shubhada Rao, an economist at Yes Bank in Mumbai, said by phone. "The government taking steps to manage all of this will have a much more calming impact on inflation."

More than half of India's farmlands get water from the June-September rainfall, which has been 49 per cent below normal so far. Food Corporation of India, the nation's procuring agency, has been instructed not to retain grains for more than 18 months, Paswan said.

Jaitley said farmers will be permitted to sell fruits and vegetables anywhere they wish rather than only in state-controlled markets. The government this week imposed a minimum export price of $300 per ton for onions.

Food costs have boosted the inflation rate in the last couple of months and "the hope is that with appropriate food management these prices will come down," Reserve Bank of India Governor Raghuram Rajan said in Mumbai on Tuesday.

He held the benchmark repurchase rate at 8 per cent on June 3, and said further tightening won't be warranted if consumer-price inflation stays on course to hit 8 per cent in January 2015.

A 10 per cent drop in rainfall may add more than a percentage point to the consumer-price index, and a "full blown drought" risks shaving as much as half a percentage point off economic growth, according to HSBC Holdings. The monsoon will be 7 per cent below normal this year as an El Nino emerges, India's weather department said on June 9.

The probability of an El Nino, which brings drought to parts of Asia, is at 70 per cent in the Northern Hemisphere summer and at 80 per cent in fall or winter, the United Nations' Food & Agriculture Organisation said in an emailed statement on Tuesday, citing an update on the weather event from its Global Information & Early Warning System.

An El Nino will reduce India's monsoon rainfall and crops from cotton to sugar and rice may be hurt, Newedge said in a report dated June 5. In 2009, the last time India experienced the event, rainfall was 22 per cent below the 50-year average, reducing food-grain output and more than doubling inflation from the previous year, official data show.

The government has amassed about 21 million tons of rice and 42 million tons of wheat, more than twice the recommended buffer stock, Agriculture Minister Radha Mohan Singh said on June 9.

Other contingency measures under consideration include a diesel subsidy to allow farmers to run pumps to irrigate standing crops, and more government funds to help buy seeds.

The government should sell 10 million tons of wheat from its inventories starting July to prevent a run-up in prices, Veena Sharma, secretary of the Roller Flour Millers Federation of India, said in a phone interview. Domestic prices usually increase from July as the harvest concludes, she said.

- Bloomberg