It has become almost a habit for one component of our food basket to become more expensive to purchase, which not just impacts our purchasing power but also poses conundrums for the central bank. This is so as the CPI which is relevant now from the point of view of policy formulation even though we all know that higher or lower interest rates do not affect the prices of pulses. But, still this component with weight of around 2.4 percent (direct and products) in the index can create havoc on the inflation front.
Pulses have become the watchword again with prices increasing by a phenomenal rate this year. The last few months have been quite disastrous with prices of tur, urad and moong accelerating upwards. Despite all assurances, nothing much has happened and the price of tur ranges between Rs 160-180 a kg depending on the location and quality. Urad ranges between Rs 120-160 /kg and moong between Rs 120-140/kg.
A myth spread by policy makers and economists is that the consumption patterns have changed which has pushed up demand. As a corollary it has been argued that there has been a preference for protein based foods which has led to the present price spiral. This is far from the truth because data shows that in the last three years there has been a decline in production of these three pulses whose prices are more sensitive than other categories of pulses.
Chana, which is a Rabi crop is the largest pulse grown in the country with around 9.5 mn tonnes being produced out of a total of 18-20 mn tonnes. It is more important from the point of view of derived products like besan which goes into our cooking. Tur is the staple along with moong and masur while urad is more popular in the south as their staple foods use this product. Production of tur was 3.14 mn tonnes in 2013-14 and had is to decline to 2.61 mn tonnes in 2015-16. In case of urad (kharif) the movement is from 1.43 to 1.37 mn tonnes and moong (kharif) 0.96 mn tonnes to 0.86 mn tonnes. If production is falling continuously, it is not surprising that prices go up when there is news of crop production being lower this year.
India imports also these pulses from countries like Myanmar, Canada, Australia and Tanzania. Typically we import around 3-5 mn tonnes depending on domestic production. Peas are another category of pulses which are imported.
Tur is a kharif crop while urad and moong are partly kharif and rabi, while chana is fully rabi. If the kharif crop is lower we have to import more from the market. India is the largest producer and consumer of pulses and hence whenever there is shortfall we can move world prices. Therefore, the same rules of demand and supply hold for imported prices of pulses. Another characteristic of pulses trading is that the crop is harvested normally once during the year (occasionally twice) but has to be made available throughout the year. Therefore stocking becomes important. There are rarely any carry forward stocks as we are constantly importing pulses to augment supplies.
If we combine all these factors then we get a grim picture. We have limited carry forward stocks of tur, moong and urad. The new crop will come from November onwards and supplements through imports would also be available in larger quantities at this time. The output is expected to be lower this year across these products. Combine these facts with the festival season that has begun when there is typically higher demand for chana and its derived products; there is a ratchet effect even on the rabi product price. This is perfect recipe for prices to move upward, which has happened as wholesalers/retailers can inflate the price as they have limited stocks.
Another standard explanation given is the phenomenon of hoarding and the government steps in to impose stock limits at the wholesale and retail ends. It is hard to distinguish between legitimate ‘stocking’ from ‘hoarding’ as farmers normally sell at the time of harvest for liquidity purposes. It is here that the intermediaries take over and stock the same and sell through the year. There is a cost of carry as well as transportation cost involved which gets added to the wholesale price.
Normally there could be at least three such transaction from the producer mandi to the final wholesale mandi before it moves to the retailer which means that these costs get magnified with a profit margin being added at every stage. Government data showed for instance that as of 2 October, wholesale prices of tur (arhar) varied between Rs 96-145 in different markets and the retail prices varied between Rs 110-150/kg depending on locations. Quite clearly there is profit to be made through the value chains.
The only way out is to increase imports which the government is doing. But matching the quantities through imports is one part if the story. The same has to be distributed through various channels which takes time. Further we are talking of importing about 5,000 tonnes which is a small quantity to really impact the prices in a big way. At best there would temporary reprieve in terms of availability of pulses in the market.
The solution is only in the medium run. We need to improve productivity which can be done by the state by offering better seeds and inputs to farmers. Increasing area may not be possible as farmers have moved way from pulses to cereals where there is more certainty in prices and there is an assured buyer for the same in the form of the government for wheat and rice. The risk for pulses is higher.
We have to be prepared for high prices for some more time. Hopefully when the domestic harvest arrives and imports from outside come in, prices will get moderated. However, our experience shows that when pulses prices increase substantially they rarely return to the old level and a three digit number for tur cannot be ruled out as being the new normal once equilibrium is reached. This is the harsh reality.
(The author is Chief Economist, CARE Ratings. Views are personal.)
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Updated Date: Oct 19, 2015 06:57:05 IST