Every third year, pulses catch price-fire: Crisil

Rating agency today said in a report that inflation has come down sharply this year for three reasons - the decline in global crude oil and commodity prices, sluggish domestic demand conditions, and softening food inflation.

Of these, the biggest contributor to the decline in the consumer price inflation (CPI) has been food prices.

Carrying a 39.1 per cent weight in the CPI, food inflation is down to 4.1 per cent so far this fiscal compared with 7.6 per cent in the same period last fiscal.

But while nearly all food components are seeing a decline in inflation, pulses inflation has seen the sharpest spike in a decade.

The CPI and WPI inflation for pulses was 42.2 per cent and 53 per cent, respectively in October.

"Data shows a clear pattern of spike in pulses inflation every third year," said Crisil. "This year though, the peak is higher than the previous two peaks. There are several factors behind high inflation in pulses in general and its frequent spikes.

A price-spike cycle usually begins with a monsoon shock that hurts production. Given that demand-side factors in recent years have been strong, supply shortfall pushes up market prices.

In many of these years, high global pulses prices have meant that imports provided little comfort to domestic prices. In fact, higher global prices lend impetus to exports.

This was especially true during fiscals 2011 and 2012 when global food prices rose nearly 18 per cent and 10 per cent, respectively.

Around the same period, domestically, rural wages surged 20 per cent on average, pushing up farm labour cost and demand.

In this scenario, both to disincentivise exports and to cover rising production costs, the government announced large increases in minimum support prices (MSPs), which tend to act as a floor for market prices.

MSPs were up 12-18 per cent in fiscals 2011 and 2013, which kept prices high.

Another reason is, over time, supply of pulses has failed to catch up with demand.

Production remained stagnant for nearly seven years since fiscal 2004, while demand accelerated, causing per-capita availability of pulses to decline and prices to spiral.

Although there was some policy push to production after 2010, yields  have remained low because of weather shocks, low irrigation cover, and lack of access to latest production technologies.

Pulses account for about 20 per cent of area under foodgrain production, but less than 10 per cent of foodgrain output.

Also, over time, production of pulses has failed to catch up with demand. Output has grown less than 2 per cent average in the last 20 years, while acreage has grown even lesser at 0.8 per cent, as a result of which yield rose only 0.9 per cent.