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OO RUEHAST RUEHBI RUEHCI RUEHDBU RUEHLH RUEHNEH RUEHPW
DE RUEHNE #2358/01 3241528
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O 201528Z NOV 09
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8674
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INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE

UNCLAS SECTION 01 OF 03 NEW DELHI 002358 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/INSB, EEB/TPP/MTAA/ABT, C-CHUANG 
USDOC FOR ITA/MAC DAS HVINEYARD 
USDOC FOR 4530/ITA/MAC/OSA/LDROKER/ASTERN 
USDA PASS U/S MILLER AND FAS/OCRA/RADLER/BEAN/FERUS 
DEPT PASS TO USTR FOR SOUTH ASIA - MDELANEY/CLILIENFELD/AADLER 
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA - MNUGENT 
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EAGR ECON EAID EFIN ECIN EINV SENV PGOV IN
SUBJECT:  India Wrestles With Food Price Inflation - Plans to Import 
Rice for the First Time in 20 Years 
 
¶1. (SBU) Summary: The government of India (GOI) is struggling to 
contain double-digit food price inflation, while sitting on 
near-record food grain stocks.  An uneven 2009 monsoon that 
significantly reduced the rice output combined with regressive GOI 
decisions on grain stocks, support prices and market interventions 
has led to high food prices.  With the common man ("Aam aadmi") 
being hurt by high food prices, food price inflation will receive 
prominent play during the ongoing winter session of Parliament.  As 
a result, the GOI is working on emergency plans to address the 
situation including rice imports and increased restrictions on 
private trade, which may cause further lag in agricultural sector 
growth accompanied by a slowdown in private investment.  The need to 
deal with the potentially explosive politics of rising food prices 
will be a core issue for the Prime Minister when he returns from his 
U.S. visit.  End Summary. 
 
Finance Minister Announces 
Rice Imports... 
--------------------------- 
 
¶2. (SBU) In a reaction to rising food prices and, in particular, the 
price of rice, for the first time in 20 years, the Indian government 
has announced it will import rice on the government's account to 
bridge the supply/demand gap.  Industry and local media sources 
report the Ministry of Commerce is seeking government-to-government 
rice deals with both Thailand and Vietnam following the recent rice 
import tenders by three state trading entities (STE) for a modest 
30,000 tons.  The tenders were ostensibly to test the market and 
received high bids.  Meanwhile, private southern flour millers, 
taking advantage of the zero import duty, have reportedly begun 
importing small quantities of wheat from Australia in containers - 
despite restrictive quarantine norms - due to the high price of 
domestic wheat.  USDA is currently forecasting that India may import 
200,000 tons or more of rice in the coming months, depending on how 
the price situation develops. 
 
...While the GOI Hoards its 
Stocks Resulting in Higher Prices 
-------------------------------- 
 
¶3. (SBU) Paradoxically, the Indian government is sitting on the 
highest level of wheat and rice stocks since 2002.  Over the past 18 
months, the GOI became the major buyer of wheat and rice in India by 
offering high support prices to farmers, discouraging private 
participation in grain trade by imposing stock restrictions, and 
banning exports.  This led to a shortage of rice and wheat in the 
open market and in turn resulted in higher prices.  Despite 
government wheat stocks totaling close to the combined wheat crops 
of Australia and Argentina at 28.5 million tons, and rice stocks far 
exceeding the combined rice stocks of all major rice exporting 
countries at 15.3 million tons on October 1, 2009, the GOI remains 
reluctant to release its surplus to ease food price inflation.  It 
is unclear how the government rice imports would help curb the price 
rise, unless the government makes available grains from its stocks 
at below-market prices. 
 
Erratic Monsoon, Ongoing Lack of 
Cold Chain: Each Have an Impact... 
--------------------------------- 
 
¶4. (U) An uneven distribution of monsoon rains this summer caused 
India's fall and early winter-harvested ("kharif") crops, including 
rice, to decline sharply, further exacerbating food inflation.  The 
poor monsoon, together with pest disease in some crops (such as 
potatoes) also resulted in a significant decline in production of 
vegetables, fruits and pulses.  This decline in production further 
contributed to food inflationary pressure.  Prices of most common 
vegetables, including potatoes and onions, have risen in recent 
months causing hardship to rural and urban poorer populations, where 
it is common for families to spend nearly 50 percent of household 
budgets on food.  India's lack of consolidated cold chains continues 
to result in significant loss and wastage in perishable food items 
during hot summers and discourages large-scale imports.  Following a 
significant downturn in sugarcane production last year and this 
year, sugar production has plummeted and prices have skyrocketed. 
Drought conditions resulting in reduced fodder availability, 
combined with high prices of feed grain and oil meals, has led to 
high domestic prices of milk, poultry, and meat products.  Major 
organized milk vendors such as Amul and Mother Dairy have raised 
 
NEW DELHI 00002358  002 OF 003 
 
 
retail prices of milk and milk products several times over the past 
few months.  Vegetable oil stands out as the only food item that has 
not increased in price over the past year, which is likely due to 
large-scale imports with no import duty. 
 
Sour Opening to Parliament: Sugar 
Farmers Protest Changes to 
Government's Sugar Pricing Policy 
---------------------------------- 
 
¶5. (SBU) As the winter session of Parliament opened on November 19, 
multiple farmer organizations descended on the Parliament building 
to protest the central government's Sugarcane (Control) Amendment, 
which alters sugar pricing policy by forbidding state governments 
from setting support prices for sugarcane higher than those already 
set by the central government.  In the past, the state government 
support price trumped the central government support price, in 
effect, forcing sugar millers and crushers to pay higher prices to 
sugarcane farmers.  Prohibiting state governments from setting their 
own prices will likely decrease the amounts paid out to sugarcane 
farmers, benefiting the millers.  Major farm organizations have 
deemed the government's decision a "black law against farmers," 
leaving the GOI in the difficult position of having to explain the 
new policy and the perceived bias against farmers. 
 
Meanwhile, India's Sweet Tooth 
Raises Global Sugar Prices 
------------------------------- 
 
¶6. (SBU) In an attempt to control the escalation of domestic sugar 
prices, the GOI has taken several measures.  Earlier in September, 
the GOI cracked down on private holders of sugar using the draconian 
"Essential Commodities Act" to restrict private stocks.  The result 
was an increase in price and a lively shell game of moving sugar 
stocks across state lines to avoid stocking penalties.  The GOI 
later permitted sugar mills to import raw, unrefined sugar from the 
global market for refining and distribution within the country.  The 
GOI has also permitted its public sector units (PSUs) to import one 
million tons of refined sugar at zero duty.  Sugar imports in FY 
2008/09 are estimated at 2.8 million tons and are forecasted to 
increase to a record six million tons in MY 2009/10.  India's entry 
into the global sugar market has significantly pushed up world sugar 
prices. 
 
GOI's Efforts to Ease Food 
Price Inflation 
--------------------------- 
 
¶7. (U) In order to combat rising food prices, the GOI has taken 
measures to stabilize prices of commodities in short supply at the 
present - or at least those facing the greatest price 
inflation-include vegetables, sugar, pulses (lentils, peas, beans), 
rice, and wheat.  Overall measures taken by the GOI include: 
 
* Abolishing import duties on rice, wheat, pulses, sugar, and 
unrefined vegetable oils; 
* allowing imports of raw sugar at zero duty by mills until March 
31, 2010; 
* allowing imports of one million tons of refined sugar by PSUs at 
zero duty until November 30, 2009; 
* banning exports of wheat, non-basmati rice, and most pulses; 
* imposing limits on stocks of rice, pulses, sugar, edible oils, and 
oilseeds by private traders; 
* imposing minimum export prices on basmati rice and onions; 
* encouraging PSU companies to import and distribute pulses at lower 
prices by providing a 15 percent subsidy; and 
* banning futures trading in key essential commodities such as wheat 
and rice. 
 
Comment: GOI's Possible Next Steps 
----------------------------------- 
 
¶9. (SBU) As current food price inflation is largely supply- driven, 
the GOI will likely make substantial efforts to increase supply 
through increased production and imports.  The zero import duty 
regime on most essential commodities will also likely continue in 
the near term.  To provide price incentives to farmers, the 
government will continue to increase support prices.  As hoarding, 
or large-scale speculative stock-holding of commodities, and black 
 
NEW DELHI 00002358  003 OF 003 
 
 
marketing are considered a partial cause of high domestic food 
prices, the government may impose further restrictions on private 
trade.  Futures trading in essential commodities will remain banned. 
 Some of these measures, while intended to help control food 
inflation, may instead backfire, reducing open market availability 
and resulting in higher open market prices.  Too much restriction on 
private trade could also negatively impact private investment in 
agriculture, further slowing agricultural growth. 
 
¶10. (SBU) Senior GOI officials have admitted to Emboffs that 
allowing food prices to rise, particularly for wheat and rice, is 
part of a strategy to provide farmers (an important strategic vote 
bank) increased income.  While the rise in such prices has perhaps 
aided wheat and rice producers, the increase of food price inflation 
into double-digits is bound to have a negative impact on urban 
consumers as well as those in rural areas not tied to farmer 
incomes, i.e., landless laborers, subsistence farmers, and those not 
dependent on the agriculture sector at all.  While it remains to be 
seen if the issue will become politically explosive in the Winter 
Session of Parliament, if India experiences yet another season of 
low rice output, the UPA government will have to significantly step 
up efforts to address the situation. 
 
 
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