[MUMBAI] India's villages face a sharp spike in food prices in 2016, as a second year of drought drives up the cost of ingredients such as sugar and milk, and poor transport infrastructure stops falling global prices from reaching rural areas.
India's first back-to-back drought in three decades also complicates government spending calculations as Prime Minister Narendra Modi tries to prune a subsidy regime that has long propped up the rural economy, and he can ill afford to alienate rural voters after a bruising weekend electoral defeat in the northeastern sate of Bihar.
It is bad news for the central bank, too, which faces a conundrum achieving its 4 per cent inflation target for the medium term as levels diverge in town and country, and infrastructure development would take years to fix it.
India's overall retail inflation eased to 4.41 per cent in September, helped by falling commodity prices, but rural inflation was at 5.05 per cent, mostly due to food prices. That, some analysts argue, could worsen, despite the dampening effect of lower wages and sluggish growth in the agricultural sector. "The impact of this year's drought will cut supplies of sugar, milk and vegetables, which the market hasn't factored in yet fully," said Harish Galipelli, head of commodities and currencies at Inditrade Derivatives and Commodities. "The first half (of next year) will be more painful than the second half." While urban dwellers have seen some cheaper imported food products, benefiting from global deflation, that has not filtered through to rural areas, given poor roads, rail and a lack of storage facilities for perishable goods.
Prices of vegetables like onions, tomatoes and potatoes have already been rising, with some staples up as much as 20 per cent in a month. Palm oil prices have also climbed in the last two months, while milk prices have risen by 10 per cent.