Rice inflation is not a supply problem, but one of poor management by government
Paddy inflation has been in double digits since February 2024, impacting overall food inflation. Despite strong rice production and procurement, the high paddy inflation contrasts with single-digit wheat inflation due to better management of wheat stocks. This discrepancy suggests potential issues in government management of rice stocks, affecting the effectiveness of the Public Distribution System (PDS) and influencing RBI’s monetary policy decisions.
Paddy has been inflating in double digits in wholesale markets since February 2024. Not only is it India’s most important cereal in terms of production, about 69 percent of the central government’s foodgrain allocation under PDS in 2023-24 was rice.
Consistent double digit inflation in paddy, therefore, keeps overall food inflation elevated and makes a majority of RBI’s monetary policy committee disinclined to lower policy interest rate even if headline inflation is projected to trend downwards. Although agriculture accounts for only 18-19 percent of India’s gross value added, high inflation often leads to the use of a blunt tool like interest rate adjustments to manage inflation expectations.
High inflation but abundant supply
India’s rice production and government procurement for PDS has been robust. This is quite different from the trend in wheat, where procurement doesn’t seem to have fully recovered from the extreme weather conditions during the 2022 harvest. Yet, wheat inflation, over the last five months has been in single digits ranging between 2.4 percent and 7.5 percent.
High paddy inflation is an anomaly which can be explained only by the poor management of rice stocks by the government which intervenes heavily in the market to keep its PDS system adequately stocked.
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