The steps are aimed at placating farmers who have borne the brunt of India's fight to control food inflation. They also surprised markets, as the government typically favours consumer interests during the peak festival season from September through the year-end, wrote Mayank Bhardwaj and Rajendra Jadhav in this piece.
After the ruling party's weaker-than-expected victory in national elections that concluded in June, the government is prioritising farmers as it faces another set of high-profile polls over the next couple months in the major agricultural states of Haryana and Maharashtra.
Since the national elections, hints of populism have emerged as Prime Minister Modi and his party try to regain their political footing.
The latest pro-farmer measures were possible in part due to abundant inventories of rice and other commodities, after this year's mostly favourable monsoon and last year's government moves to restrict exports and free up imports. Those measures sought to address an El Nino-disrupted growing season and consumer anger over food prices.
Weather-related supply disruptions are likely to remain the norm in India, rendering food price inflation endemic, the central bank warned in a research paper published in August.
Indeed, there are signs a decline in food prices in August may be short-lived, with vegetable prices up 8% in September from the month before, according to data from IDFC Economic Research. And this year's prolonged monsoon was not without its downsides, including crop damage from surplus rain.
These risks could push headline inflation back up above the central bank's target of 4% over the remainder of the financial year and prompt interventions such as the release of onion stocks announced last month.
As the government considers further policy moves, it will face some tough choices to balance the interests of consumers, who spend half their disposable income on food, and the politically influential agriculture sector, where 45% of India's 1.4 billion people make their living.
The Indian government has turned to spending programmes to help ease its dilemma, approving in September a special fund of more than $4 billion until the fiscal year 2025/26.
That money will be used to prop up prices for producers or ensure stable prices of essential commodities for consumers, the government said.
But the Modi government will have limited room to spend its way out of the dilemma if it hopes to stick to the fiscal conservatism of its past two terms, with the aim of attracting investors and keeping interest rates in check.
What are India's best options to tackle extended bouts of food inflation, in a way that protects consumers without over-burdening farmers? Write to me at ira.dugal@thomsonreuters.com.
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