Though it took very high inflation for several years and a drubbing in 4 of 5 assembly elections to do the trick, Congress vice-president Rahul Gandhi has announced a critical agriculture reform that will go a long way in fixing the current bout of inflation. The flip side of this will be RBI will likely pause once again next month to see the impact of the measure on the prices of fruits and vegetables that are currently driving both CPI and WPI. It will also be a big shot in the arm for organised retailers who can now, at least in the states that decide to delist fruits and vegetables from the APMC Act, source directly from farmers. While Azadpur in Delhi and Vashi in Maharashtra are the biggest mandis in the country—50,000 tonnes of fruits and vegetables come every day to Azadpur mandi and 43,000 tonnes to Vashi—both states can do the delisting quickly. The Congress is in power in Maharashtra and while the Aam Aadmi Party is now going to rule Delhi, there is no reason to suspect it won’t want to do the same. The next two large mandis, in Bangalore and Hyderabad—they handle around 6,000-7,000 tonnes every day—are also in Congress-ruled states.
The impact on inflation, as Commission for Agricultural Costs and Prices Chairman Ashok Gulati argued in this newspaper on Wednesday, will be immediate since the mark-up from wholesale to retail markets can be 2-3 times. Between April and November FY14, food articles WPI inflation rose 14.1% as compared to a lower 9.4% in the same period of FY13. Strip this away and the non-food manufactured WPI inflation rose a mere 2.5% in April to November FY14, or less than half the 5.3% in the same period of FY13. A Citi research note estimates that, all other things being equal, a 25% fall in vegetable prices from current levels will pull down WPI by around 100bps and CPI by around 200bps.
What the Congress vice-president has not said, and which is equally significant, is the need to come down heavily on cereals inflation—at 15% in the April-November FY14 period, this contributed a whopping 0.5 percentage points to WPI inflation. The way to kill cereals inflation, as this newspaper has been arguing for a long time, is to simply dump 10-15 million tonnes of wheat and rice from FCI stocks—this would kill cereals inflation, provide the government