The Indian government has tightened its food policy again to curb inflation

The Indian government recently announced a ban on onion exports, which will last until March 2024. In addition to this, the Indian government has also removed import duties on yellow peas. Previously, the Indian government had introduced export restrictions on sugar and rice in early 2023.

These initiatives are all attempts to bring down food prices in India. According to the Economic Daily, India's economy has performed well recently, but domestic inflation levels remain high, and the domestic market is generally concerned about this.

According to public opinion analysis, inflation and food price problems will have an impact on Indian Prime Minister Modi's re-election campaign. Although the Indian government's series of food export bans and food exemptions will cause ripples around the world, the Indian government is more concerned about the general election around May 2024, so the policy may continue until the general election.

On December 15, 2023 local time, in Srinagar, Indian-administered Kashmir, a hawker was sorting onions. Visual China Diagram

Political "onion law"?

Prior to the recent ban, the Indian government had already introduced restrictions on the import and export of onions. In August this year, the Indian government imposed a 40% export tax on onions, in order to ensure domestic supply and prevent the price of onions in the wholesale market from soaring to 50 Indian rupees (about 4.29 yuan) per kilogram.

In December, onion sowing in India experienced another rainfall problem: the price of onions in the wholesale market rose to INR 45 per kilogram as a result of late, low and interrupted rainfall in the onion-growing areas. Such a rally prompted the Indian government to make the latest decision on an export ban.

Onions have a huge impact on Indian public opinion. In 1998, the Bharatiya Janata Party, which was then in charge of the capital, New Delhi, lost the election due to rising onion prices, hence the nickname "political vegetable" in India.

At the same time, different crops in India have been affected by climate change. In August 2023, India was hit by the driest weather in the same month since 1901, which hit crop yields, especially commodities such as rice, sugar, and wheat. India's rice production is expected to decline by 3.79 percent to 106.31 million tonnes in 2023 by India's agriculture ministry.

Sarbartho Mukherjee, senior economist at credit rating agency CareEdge, said: "It is worth noting that inflation in India's key commodities such as pulses, grains and spices has remained in double digits in recent months. Recently, the surge in sugar and vegetable prices is worrying. ”

Currently, the average retail prices of onions, tomatoes, rice and sugar in the country are up 98 per cent, 32 per cent, 14 per cent and 5 per cent respectively from a year ago, according to government data. India's inflation rate rose to 5.55 percent in November, the highest in nearly three months, driven by high food prices. Mukherjee said it was a key "priority" for the government to regulate food prices ahead of the general election.

According to the Economic Daily, India's strong stimulus economic model has brought strong growth, but it has also created problems for the Indian economy. The RBI has repeatedly said that it is "trying to maintain inflation at its target level of 4%", and the Modi government did bring inflation down to 4.87% in October, the lowest in the past four months. However, it will still be difficult to achieve the 4% target through policy regulation in the remaining time.

RBI Governor Dass made it clear at the central bank meeting in early December that the inflation outlook will continue to be affected by high food prices, mainly due to the fact that key vegetable prices are likely to push inflation higher, and sugar and crude oil price volatility in the international market also needs attention. "More importantly, in 2023, due to the impact of abnormal weather, floods or droughts of varying degrees will occur in many parts of India, which will greatly affect the grain harvest, and the prices of some cereals and vegetables will increase significantly. ”

Mukherjee analyzed that the volatility of food prices remains the most important challenge for the RBI to curb inflation. Economists expect food price volatility to continue in the coming months due to falling reservoir levels and delayed planting of crops such as onions.

Some analysts also stressed that the Indian government needs to find other solutions beyond the ban. "The long-lasting solution [to climatic conditions affecting yields] is better storage, better food processing. Otherwise, the blow to the production process quickly translates into a price spike, and the government often has to resort to import and export bans to curb price increases. Dharmakirti Joshi, chief economist at CRISIL, an Indian rating agency, said.

Indian agriculture is driving global food prices

Back in early 2023, India imposed restrictions on the export of sugar and rice. Shortly before the ban on onion exports, India also restricted the use of sugarcane to produce biofuels. In July, India, the world's largest rice exporter, banned the export of broken rice and non-basmati white rice varieties, a decision the Food and Agriculture Organization of the United Nations said had pushed global rice prices to their highest level in 15 years. The Indian government also extended the previous ban on sugar exports from October 2023 to September 2024, during which only 6.1 million tonnes of sugar were allowed to be exported, almost half of what it was in 2022.

India's onion ban in December, like earlier restrictions on rice and sugar exports, affected many countries outside of India, according to local media reports in India and some South Asian countries. Bangladesh, for example, doubled the price of onions after the onion ban. Other neighboring countries such as Nepal, Bhutan, Sri Lanka and other neighboring countries have also seen an increase in onion prices.

Malaysia's agriculture and food security minister, Mohammad Sabu, said the country would source onions from China and Pakistan in response to the problems caused by India's export ban. Nepal, for its part, said it would ask India to continue exporting onions to Nepal for an exemption.

Biswajit Dhar, a scholar at India's Council for Social Development, said food inflation has not yet become a political issue in India today. However, the beginning of 2024 will be a key challenge. "At that point, fresh stocks of vegetables have not yet arrived, and prices usually skyrocket. ”

From the perspective of the current policy, the Modi government is more concerned with prices, public opinion and domestic affairs, followed by exports and international trade of neighboring countries. Especially with the election approaching, political considerations have become his top agenda. Next, Prime Minister Narendra Modi will seek his third term, which is also facilitating the formation of a third majority government by the BJP behind him.

Current polls show that Modi and the BJP are the strongest contenders for India's 2024 general election, and they have a clear advantage. According to the Economic Daily, in addition to the issue of inflation, India's economic data is bright. On December 8, the Reserve Bank of India (RBI) announced that it had raised its forecast for India's gross domestic product (GDP) growth for the 2023/2024 fiscal year (April 1, 2023 to March 31, 2024) from 6.5% to 7%, keeping inflation expectations for FY2024 at 5.4%, while also announcing that interest rates would remain unchanged at 6.5%. The key to these forecasts is India's strong performance in the most recent quarter. According to official data, India's GDP grew by 7.6% year-on-year in the third quarter of this year, which is significantly higher than the RBI's previous forecast.

This was largely due to the growth of the manufacturing and construction sectors, as well as the Modi government's efforts to increase government investment in the run-up to India's general elections. At present, the Modi government is mobilizing financial resources to promote the country's infrastructure. In the current fiscal year's budget, the Indian government has increased capital investment spending for three consecutive years, with a massive increase of 33% to 10 trillion rupees (about $120 billion).

The Modi government appears to be quite confident in its economic policies. In early December, the Bharatiya Janata Party (BJP) won elections in three key states, laying a solid foundation for the 2024 general election, and the Indian stock market Nifty 50 Index and BSE Sensex 30 Index also hit record highs. The BJP currently believes that they do not need to use radical means to stimulate the economy and attract votes. However, price stability remains a very critical issue.