Why milk and dal are hurting your purse, and will do so for a while more

Fuel, packaging, raw material costs wield inflationary pressure that will take time to abate; will the RBI and government step in to tame the monster?

The prices of milk and vegetables have risen sharply since 2017.

The cost of living is rising every month, with prices of almost all daily essentials on fire. According to the Centre’s own retail data presented in the Lok Sabha earlier this week, what you and I pay for a litre of milk has increased by a whopping ₹7 in the last four years.

A kilo of onions is more expensive by a third, or by about 33%, now than in 2017; packed mustard oil costs nearly ₹50 more and 1 kg of the commonly used tur (arhar) dal now costs ₹22 more.

Milk prices have been rising year-on-year due to persistent inflation in input materials — transportation costs are up, as are packing costs. Onion prices rise seasonally; cooking oil prices have been on a boil due to global commodity price increases and India’s excessive import dependence.

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Other items costlier, too

Data submitted in Parliament make it clear that in the last one year alone, prices of daily use items have seen a sharp hike. Minister of State (MoS) for Rural Development and Consumer Affairs, Food & Public Distribution, Niranjan Jyoti, said prices of 15 out of the 22 items which her department tracks have risen in 2021 over 2020.

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Even between February and September 2020, the pre and post lockdown months, there was an increase in prices of vegetables such as potato and tomato but there was a moderate decline in some other commodities.

“ln cereals the prices of rice increased by 3.58% while the prices of wheat declined by 3.19%. Among pulses, masoor and tur recorded the highest increase of 15.07% and 9.22%, respectively. In the case of edible oils, sunflower oil and groundnut oil recorded an increase of 9.45% and 9.89%, respectively,” the MoS told the Lok Sabha.

The rampant price increase in food items is due to several factors: demand-supply gaps, shortfall in production owing to adverse weather conditions, seasonality, increased transportation costs and supply chain constraints, she said.

Unlikely to abate

These inflationary pressures are unlikely to abate over the next few months, as pump prices of petrol and diesel remain at record highs, supply side constraints continue to fuel vegetable prices and cooking oils remain hot.

A Mumbai-based brokerage has blamed the increase in prices of motor fuels, cooking oil and fats as major inflation drives. It is no secret that the pump price of petrol has crossed the ₹100 per litre mark at many places in the country; similarly, prices of common cooking oils such as mustard oil have spiked sharply for many months now.

In a report last week, State Bank of India’s research desk said that according to its calculation, every 10% increase in petrol pump prices (Mumbai) translates into a 50 bps (0.5%) increase in CPI (consumer price index).

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Not just pump fuels, inflation rises from cooking oils, too. Oil and fat inflation has risen to 34.8% in June from 30.9% in May this year, proving that the cut in basic import duty imposed by the government on crude palm oil (10% from 15%) and on refined palm oil (37.5% from 45%) has not had much impact.

Government measures

On its part, the government has taken some other steps, too. To arrest the spiralling pulses’ prices, it imposed stock limits on some dals. In the beginning of July, it issued a notification imposing a 200-tonne stock limit for pulses’ wholesalers and 5 tonnes for retail traders. This was subsequently eased but has not been lifted completely.

Meanwhile, another Mumbai-based brokerage said in a note last week that the June CPI inflation was 6.3% over June 2020 but was similar to the number reported in May this year.

This brokerage noted the key trends in the inflation saga thus: “Food inflation rose modestly to 5.6% despite low base, indicating possibility of stabilising price pressure. Inflation was benign in cereal, milk, meat and fish, but elevated in pulses and oilseeds. Core CPI was sticky above 6% driven by rising input prices. Medical, energy and textile remained elevated, but housing was soft. Going ahead, we expect inflation to remain high at around 6% in the near term, before easing.”

Role of Reserve Bank

Given consistent high inflation — CPI has breached the RBI tolerance band for two months straight – the role of the Reserve Bank of India (RBI) in tackling the inflation monster has recently come under the scanner. Brokerages have concurred in pointing out that inflation would be “transient” and given the persistent and simultaneous growth concerns, the RBI is expected to look through inflation concerns for now.

It has, however, advised the government to contain the total taxation on motor fuels to tame inflation. In the last monetary policy statement, the central bank said: “Going forward, the inflation trajectory is likely to be shaped by uncertainties impinging on the upside and the downside. The rising trajectory of international commodity prices, especially of crude, together with logistics costs, pose upside risks to the inflation outlook. Excise duties, cess and taxes imposed by the Centre and states need to be adjusted in a coordinated manner to contain input cost pressures emanating from petrol and diesel prices.”

Will the Centre, which has been making a windfall through elevated taxes on motor fuels, listen?

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