The government believes that the expectation of a poor monsoon and consequent fall in harvests has encouraged traders and middlemen to hoard food staples such as onion and potato.

For a government that rode to power on the back of widespread dissatisfaction among people over runaway prices, especially of food commodities, the rising cost of onion and potato are posing a major challenge now. Though there is no reason to panic yet, as Finance Minister Arun Jaitley said after addressing a meeting of State Food Ministers, there is little doubt that there is cause for concern mainly because the monsoon is playing truant. After its poor performance in June, the revival in July has been patchy, fuelling inflationary expectations in foodgrains and vegetables. The government believes that the expectation of a poor monsoon and consequent fall in harvests has encouraged traders and middlemen to hoard food staples such as onion and potato. The decision to bring the two vegetables under the purview of the Essential Commodities Act and imposing stock limits on them is a direct result of this reading. Simultaneously, the government has increased the minimum export price of onion to $500 a tonne; the earlier level of $300 a tonne has not been effective enough. India is one of the largest onion exporters in the world, and last year it shipped out about 1.3 million tonnes of the bulb — which was a little less than 10 per cent of the country’s total output.

The move to set stock limits could also be a strategy to co-opt State governments in the fight against inflation because the role of the Centre is limited to notifying the commodity under the Essential Commodities Act. Setting of actual stock limits and cracking down on hoarders are entirely under the purview of the States. The Centre will need to work in tandem with State governments on the issue of fighting food inflation because most levers to reform the supply chain are with them. Whether it is reforming procurement practices or minimising the role of middlemen or amending the Agricultural Produce Marketing Committee Act, the power is all with the States. At this point in time, the Centre is waging a psychological battle to douse expectations of a shortage in food commodities due to the poor monsoon, but if the monsoon fails to revive in the next couple of weeks, it will have a real fight on its hands. What should lend comfort though is the large stocks of foodgrains that it is carrying — it has already allocated an additional 50 lakh tonnes of rice for PDS distribution. The fight against food inflation is critical for the government as it will have an impact on the monetary policy of the Reserve Bank of India. Food inflation rebounded in May to 9.50 per cent after a slight dip in April, and the June data are unlikely to be encouraging — which means that easier interest rates to spur growth are now that much more distant.

More In: Editorial | Opinion