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O 171306Z DEC 09
FM AMEMBASSY NEW DELHI
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UNCLAS SECTION 01 OF 04 NEW DELHI 002515 
 
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DEPT PASS TO USTR FOR SOUTH ASIA - CLILIENFELD/AADLER 
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA - MNUGENT 
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAGR ECON EAID EFIN ECIN EINV SENV PGOV IN
SUBJECT: High Food Inflation Eclipses Economic Recovery 
 
REF: NEW DELHI 02482 
 
¶1. SUMMARY: Despite a promising overall economic outlook, rising 
food price inflation continues to pose a serious challenge to the 
Government of India (GOI).  Food prices increased by a staggering 
19.95 percent for the week ending on December 5, the fastest pace in 
eleven years.  Causes of the rising food prices include both supply 
and demand factors. Uneven distribution of monsoon rains this summer 
resulted in a decline in production of India's fall and early 
winter-harvested (kharif) crops, while India's overall economic 
growth has driven up purchasing power, particularly in the rural 
sector.  Increased government procurement of essential commodities 
and high government support prices has also played a role in rising 
food inflation.  The GOI has taken various measures meant to contain 
food prices, including abolishing import duties for essential food 
items such as rice, wheat, pulses, sugar, and vegetable oils; 
imposing stocks and licensing restrictions on private trade of 
essential commodities and banning futures trading.  Nevertheless, 
analysts predict that some of these measures will likely backfire 
rather than help.  Extensive restriction on private trade could also 
negatively impact private investment in agriculture, further slowing 
agricultural growth.  In Parliament, the opposition has taken up the 
offensive, criticizing the Congress-led United Progressive Alliance 
(UPA) for allowing food prices to rise.  Because food price 
inflation is always a potentially explosive political issue in the 
Indian context, further political fallout can be expected if food 
prices are not contained.  End Summary. 
 
Economic Growth Accelerates 
in the Second Quarter ... 
---------------------------- 
 
¶2. Buoyed by manufacturing and services sectors, India's gross 
domestic product (GDP) registered 7.9 percent growth during the 
second quarter of Indian Fiscal Year (IFY) 2009/10 (Apr-Mar), well 
above forecasts made by most government agencies and non-government 
entities (see reftel).  This rate compares with 6.1 percent growth 
in the first quarter and 7.7 percent during the corresponding 
quarter of the previous fiscal year.  The surge in GDP growth was 
fueled by private consumption growth, supported by government 
stimulus packages and an increase in government stimulus 
expenditures.  The higher than expected second-quarter growth in GDP 
has prompted many experts of the Indian economy to revise the 
country's economic growth forecast upward to seven percent or above 
in IFY 2009/10 from the earlier forecast of around 6.5 percent.  IFY 
2008/09 GDP growth rate reached only 6.7 percent, significantly down 
from the average nine percent growth registered during the previous 
three years due to the global financial crisis. 
 
¶3. Agricultural GDP growth in the second quarter of IFY 2009/10, 
however, was a modest 0.9 percent compared with 2.4 percent in the 
first quarter and 2.7 percent during the corresponding quarter of 
IFY 2008/09.  There are further apprehensions about third-quarter 
agricultural GDP growth due to the negative impact of the drought on 
agricultural production during the fall and early winter harvest 
season, which could pull down overall economic growth.  Many 
economists argue that since the contribution of the agriculture 
sector to the country's GDP has now declined to 17 percent, overall 
GDP growth is decoupling from agriculture. 
 
... As GOI Continues Fighting 
High Food Price Inflation 
---------------------------- 
 
¶4. Despite the promising economic growth outlook, containing rising 
food inflation continues to pose a serious challenge to the GOI. 
Although India's headline wholesale price index-based inflation rose 
more than expected by 4.78 percent YOY in November 09 from 1.34 
percent in October 09 (since peaking at around 13 percent in early 
August 2008), food price inflation continues to gallop, reaching 
19.95 percent for the week ending December 5, far exceeding the 
previous peak reached following the global commodity boom in 2008. 
This food price figure is based on an index of food articles 
compiled by the Ministry of Commerce. 
 
¶5. According to experts, the wholesale price index-based inflation 
does not capture the full impact of the rise of food prices as the 
food group weight in the index is only around 15 percent.  A more 
accurate indicator of the effect that food price inflation is having 
on consumers would be the various consumer price indices (CPI), 
which are more heavily weighted toward food than the wholesale price 
index.  As of October, the three CPIs reported inflation ranging 
from 12 to 14 percent, indicating how high food prices have eroded 
the average consumer's purchasing power, posing a further challenge 
to GOI efforts to address food and nutrition security. 
 
NEW DELHI 00002515  002 OF 004 
 
 
 
¶6. On December 16, the opposition took up the issue of food 
inflation in Parliament, forcing a shutdown of the lower house (Lok 
Sabha) as opposition members accused the government of not taking 
action to counter sky-rocketing food prices.  Local media reports 
that opposition leaders claimed they would "take the issue to the 
streets" if the GOI does not change policy.  Trade unions, including 
one Congress trade union, protested the rising food prices outside 
the Parliament.  On December 17, a panel of Indian MPs presented a 
report criticizing the government for failing to intervene, 
demanding an investigation into surging sugar prices and new 
mechanisms to provide basic food items directly to low-income 
consumers. 
 
¶7. With food price inflation discussions taking on heightened 
significance during the ongoing wQter session of the Parliament, 
the GOI is in emergency mode trying to tackle the situation through 
imports and more restrictions on private trade.  One victim of the 
current high food inflation is the Congress-led government's 
election promise of enacting an ambitious Food Security Act, which 
seeks to supply 25 kg of wheat or rice per month to below poverty 
line (BPL) families at a highly subsidized rate of Rs. 3 (U.S. 6 
cents) per kg.  Implementation of the provisions of this legislation 
was already posing a challenge to the GOI due to ambiguity regarding 
the number of BPL families, the problem in delivering the grain to 
targeted families, and the additional government subsidy involved. 
Food price inflation, along with these overall implementation 
problems, has forced the GOI to stall enactment of the Food Security 
Act, if not completely abandon it. 
 
Causes: Supply-Side Problems 
---------------------------- 
 
¶8. Several factors, mostly supply-driven and some policy-related, 
have contributed to the current spurt in food prices. 
An uneven distribution of monsoon rains this summer resulted in 
decreased harvests of fall and early winter crops, particularly rice 
and coarse cereals, which increased prices.  The poor monsoon and 
pest disease problems in some crops such as potatoes also resulted 
in a decline in production of vegetables, fruits and pulses, further 
contributing to food inflationary pressure.  Lack of a consolidated 
cold chain also results regularly in large losses in perishable food 
items in high summer temperatures and discourages large-scale 
imports.  Following a significant cyclical 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, have led to high domestic prices of milk, poultry, 
and meat products.  Major organized milk vendors such as Amul and 
Mother Dairy have raised their retail prices of milk and milk 
products several times in the past few months.  Prices of tea, 
coffee, condiments and spices have also moved up steadily over 
recent years due to production declines, combined with increasing 
demand.  The only food item price that has not gone up in the past 
year is vegetable oils, due to large-scale imports of lower-priced 
vegetable oils at zero import duty. 
 
Causes: High Support Prices and 
Larger Government Procurement 
-------------------------------- 
 
¶9. High support prices and increased government procurement have 
contributed to current food price inflation as well.  Although rice 
and wheat production have shown a steady increase over the past 
decade, reaching record levels of 99.2 million tons and 80.6 million 
tons respectively in the 2008/09 marketing year, such increases in 
production were achieved by offering high minimum support prices 
(MSP) to farmers.  Over the past five years, the wheat MSP has 
increased approximately 70 percent to the current Rs. 10,800 (USD 
232) per ton.  For Marketing Year (MY) 2011, which is from March to 
April 2010/11, the GOI has announced a support price of Rs. 11,000 
(USD 236.5) per ton.  MSP for paddy (rice) increased over 70 percent 
to Rs. 10.300 (USD 221) per ton for superior grades, thus 
establishing high market-clearing prices.  There have also been 
significant increases in the support price for other commodities 
such as oilseeds, pulses, and coarse grains. 
 
¶10. By offering high prices in 2009, the GOI has procured a major 
share of India's wheat and rice production, resulting in smaller 
open-market availability for these grains, further contributing to 
high market prices.  Paradoxically, the GOI 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 very high support prices to farmers, discouraging private 
participation in grain trade by imposing stocks restrictions and 
 
NEW DELHI 00002515  003 OF 004 
 
 
banning exports.  To illustrate, GOI wheat stocks are close to the 
combined wheat crops of Australia and Argentina at 28.5 million 
tons, and rice stocks far exceed the combined rice stocks of all 
major rice exporting countries at 15.3 million tons as of October 1, 
¶2009.  Despite this, the GOI has been reluctant to sell surplus at 
below-market prices in the open market to help ease food price 
inflation. 
 
Causes: Increased Demand 
------------------------ 
 
¶11. Strong economic growth in recent years, notwithstanding a 
slowdown last year due to the global economic crisis, has resulted 
in increasing purchasing power in the economy.  The rise in consumer 
demand for high-value food products such as milk, meat, fruits and 
vegetables is also contributing to the increase in prices of these 
commodities.  The GOI's flagship National Rural Employment Guarantee 
Act (NREGA), which provides assured employment to one member of the 
family for at 100 days a year at a minimum daily wage of Rs. 100, 
has led to increased purchasing power.  Finally, the easy credit 
policy and release of overdue pay to government employees has also 
contributed to increased purchasing power in both rural and urban 
areas.  This increase in purchasing power has led to higher demand 
for food products, pushing up prices for food. 
 
Food Price Inflation and Trade 
------------------------------- 
 
¶12. Despite the sharp decline in fall and early-winter rice 
production this year due to the delayed monsoon, near-record 
government wheat and rice stocks should allow the GOI to make it 
through the crisis without imports.  To rein in the rising prices of 
rice and wheat, the GOI has decided to sell both these commodities 
in the open market at the GOI's support price, which is higher than 
prevailing market prices.  This has in fact contributed to the food 
price inflation.  Hence, the GOI is now considering selling wheat 
and rice at lower prices.  In order to conserve grain stocks, the 
GOI has decided not to permit exports of wheat and non-basmati rice 
in the foreseeable future, even on a government-to-government basis 
as food aid.  Although the GOI has permitted imports of rice at zero 
import duty, no imports have taken place because the international 
prices of rice are even higher than the domestic price.  In the case 
of wheat, despite zero import duty and lower international prices, 
the GOI's overly-stringent phytosanitary norms make large-scale 
imports difficult.  However, some private millers in south India 
have started importing small quantities of wheat in containers. 
 
¶13. The GOI does not maintain buffer stocks of pulses, thus large 
imports of pulses at zero duty will continue.  According to 
analysts, the GOI is likely to continue and even increase the 
subsidy provided to public sector trading companies for imports of 
pulses to offset any losses.  The GOI has decided to continue the 
zero import duty on crude vegetable oil imports and the low (7.5 
percent) duty on refined vegetable oil imports indefinitely in order 
to contain any potential increase in prices of vegetable oils 
following a poor harvest.  Zero duty imports of sugar will continue 
in MY 2009/10 to contain the rising prices of sugar.  There is 
little the GOI can do to contain rising prices of vegetables and 
fruits due to supply side constraints.  However, a duty reduction on 
vegetable and fruit imports, which are currently subject to more 
than a 30 percent import duty, would possibly encourage increased 
imports and expand free market supplies. 
 
WHAT NEXT?  GOI'S NEXT STEPS 
----------------------------- 
 
¶14. Because the current food price inflation is largely 
supply-driven, the government is making an all out effort to 
increase agricultural production in the winter (rabi) season by 
providing various input subsidies and soft credit support to 
farmers.  As hoarding (large scale speculative stock holding of 
commodities) and black marketing by private traders are considered 
to be some of the reasons for high domestic food prices, the GOI has 
encouraged state governments to impose stocks limits and price 
controls on private trade dealing in rice, paddy, pulses, sugar, 
edible oils, and oilseeds under the Essential Commodities Act. 
Accordingly, many states have imposed such restrictions. 
 
¶15. COMMENT:  With most of the food inflation supply-side driven, 
there are no easy or quick fixes for the GOI to reign in rising food 
prices.  The GOI is likely to try measures such as continuing the 
ban on futures trading of agriculture products, placing further 
limits on private trade, making efforts to increase rice production, 
or tightening monetary measures.  However, as with most GOI efforts 
to date to manage the agriculture sector, many of these measures 
 
NEW DELHI 00002515  004 OF 004 
 
 
will likely backfire.  Instead of helping to control the food price 
inflation, the measures will reduce open market availability, 
resulting in higher open-market prices, slowing of agriculture 
growth and slowing of growth in the overall economy.  Because food 
price inflation is a volatile political issue in the Indian context, 
a significant increase in attention and continued criticism of the 
UPA-led government from the opposition can be expected if food 
prices are not contained.  END COMMENT. 
 
 
ROEMER