By Rajendra Jadhav and Aftab Ahmed
MUMBAI/NEW DELHI (Reuters) - A broad rise in prices of food essentials in India driven by uneven and scanty rain is forcing the government into a series of measures to boost supplies and ease inflationary pressures.
While annual retail inflation was at a 15-month high of 7.44% in July, food price inflation rose to 11.5%, its highest in more than 3 1/2 years, pushing Prime Minister Narendra Modi's government to act quickly to avert any backlash from voters in upcoming state and national elections.
To ease the hardship for low-income consumers, the government is considering expanding a free food programme which is due to end in December, according to two government sources who declined to be named as they are not authorised to speak to the media.
Food subsidies are estimated to cost the government 1.97 trillion Indian rupees($23.83 billion) in 2023/24 and an expansion of the free food scheme could raise the bill.
The government has stepped up sales of subsidised vegetables, particularly onions and tomatoes, through its distribution network, while releasing stocks of wheat and sugar into the market to cool prices.
The measures could cumulatively cost the government over $12 billion, the government sources said.
Additionally, the government is set to ban sugar exports for the first time in 7 years, having banned exports of key categories of rice last month. Reuters has reported that the government is also considering importing wheat for the first time in years.
The government is more concerned about cereals and pulses, which have the largest weight in the consumer food basket, than perishables, said another government source who also declined to be named.
While the government will avoid knee-jerk actions, it will be proactive in curtailing inflation, the source said.
Neither the Finance Ministry or the Prime Minister's Office replied to e-mails and messages seeking comment.
"While the month-on-month momentum of food prices has eased in August partly due to the government's interventions, uncertainty over the impact of weak rains remains high," said Gaura Sen Gupta, economist at IDFC First Bank (NASDAQ:FRBA) Economic Research.
SUPPLY SHOCKS
After above average rainfall in July, the first three weeks of August have been uncharacteristically arid, impacting prices of kitchen essentials such as cereals, vegetables, sugar, spices, meat and dairy products.
"Crops are not receiving the necessary rainfall when they need it the most," said Harish Galipelli, director of trading firm ILA Commodities India Pvt Ltd.
Tomato prices climbed to record levels forcing households to cut back and fastfood chains like McDonalds and Subway to take them off their menus temporarily.
"It has been two months since I bought tomatoes and we do not eat pulses regularly nowadays. A lot of times we just eat rotis and salt for dinner," said Mohammad Siraj, a farm worker in the northern state of Uttar Pradesh who earns 250 rupees ($3.03) a day to support a family of eight.
India's rice crop is worst impacted after it was submerged by erratic rainfall in some rice growing northern states in July, and now a dry spell is threatening yields in southern and eastern states, exporters said.
Pulse prices could also remain elevated for more than a year as the dry spell is denting yield potential, said Nitin Kalantri, a pulses trader.
India is trying to boost pulse supplies through imports but there is a limited surplus available from exporters such as Australia, Mozambique, Myanmar and Tanzania.
Sugar prices are also expected to rise as demand improves during religious festivals in coming months, and looking further ahead there are uncertainties over supplies for the next season, said Ashok Jain, president of the Bombay Sugar Merchants Association.
Uncertainty has increased over the outlook for both summer and winter crops as there is a 95% chance that El Nino will prevail from December 2023 to February 2024. Apart from bringing less rain, El Nino also keeps temperatures above normal.
"A heatwave during the winter months could trigger a second phase of price increases," a Mumbai-based dealer with a global trade house said.
($1 = 82.4700 Indian rupees)
(Additional reporting Saurabh Sharma; Editing by Simon Cameron-Moore)