Monsoon rains delay harvests and accelerate India’s food inflation

Onion prices in India may extend a record rally as heavy monsoon rains delay harvests and worsen a shortage, potentially accelerating food inflation in Asia’s third-largest economy.

Retail prices of the vegetable used in everything from soups to curries soared to 70 rupees (€0.84) a kilogramme in New Delhi this week from 20 rupees three months earlier, according to the Consumer Affairs Ministry.

Prices may increase further as farmers are unable to pick the crop due to monsoon rains, said CB Holkar, a director at the National Agricultural Co-operative Marketing Federation of India.

Surging onion prices may fuel inflation and limit the Reserve Bank of India’s room to ease interest rates to revive the weakest economic growth in a decade. Prime minister Manmohan Singh needs to curb food prices and stem a decline in the rupee to boost the prospects of his Congress party in state polls later this year and the general elections due by May.

“Rise in onion prices has always been a very sensitive issue,” said PN Vasanti, director of New Delhi-based Centre for Media Studies.

“It has affected the poorest of the poor the most. It has become an electoral issue earlier.”

Food prices climbed 18.2% in August from a year earlier, with onion costs surging 245%, official data showed Sept. 16. The economy expanded at the slowest pace since 2003 in the year ended March as investment fell and consumer spending moderated. HSBC Holdings and Goldman Sachs Group cut growth estimates for India to 4% in 2013-2014.

Singh’s government last month asked state-run trading company PEC Ltd and Nafed to import onions to control prices. PEC has yet to float a tender after asking suppliers to register with it, said Ravi Kumar, a company director. Nafed cancelled a tender to import as there was a lone bidder, said S Biswas, a general manager at the New Delhi-based company.

“The government is very serious about the impact of rising imports on the current-account deficit,” said Arun Singh, an economist at Dun & Bradstreet Information Services India in Mumbai. “That probably is the reason it’s delaying decision on onion imports.”

Singh’s government has raised taxes on gold imports and eased curbs on investment from abroad to bolster the economy. It is seeking to cap current- account deficit to about $70bn (€51.7bn) in the fiscal year ending Mar 2014 from a record $87.8bn in the previous 12-month period.

Political parties have lost elections in India over the cost of onions. Former prime minister Indira Gandhi swept back into power after a gap of three years in 1980 by turning the price of onions into a populist rallying cry. The Bharatiya Janata Party lost the state election in Delhi in 1998 as the government could not control onion prices.

“We have reduced the consumption of onion as it is the only option with such high prices,” Subhashish Ghosh, a 31-year-old marketing executive living in New Delhi since 2001 said. “If vegetables are beyond our reach, how can we think of eating proteins or making it available to our children. I am not satisfied with the government policy to control prices.”

India’s wholesale-price index rose 6.1% in August, the most in six months, according to the latest government data. The RBI predicts inflation will be around 5.5% in the fiscal year through Mar 2014.

There is no room for complacency on inflation and “the Reserve Bank will closely and continuously monitor the evolving growth- inflation dynamics with a readiness to act pre- emptively, as necessary,” the central bank said today.

The Congress may be defeated in elections to Madhya Pradesh, Rajasthan and Chhattisgarh states later this year, while it may struggle to retain power in New Delhi, an opinion poll released by Times Now television channel and C-Voter polling agency says.

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