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Indian authorities have stepped up efforts to control domestic supplies and prices of agricultural commodities such as sugar, onions and wheat ahead of next year’s general election, the latest in a series of interventions that have sent shockwaves through global markets.
Authorities have in recent days banned onion exports, restricted the use of sugar for ethanol production and cut the size of the wheat stocks that traders and retailers are allowed to hold.
India is one of the world’s largest agricultural commodity producers and exporters. But the world’s most populous country also has a highly sensitive domestic market, with hundreds of millions of people dependent on cheap, subsidised food.
The moves came on top of existing restrictions on exports of rice, wheat and sugar that have pushed global prices higher and disrupted supplies for major importers that depend on Indian-grown food.
Sugar, for example, had already been trading at multiyear highs in part because of expectations of reduced supply from India after bad weather disrupted production. In neighbouring Bangladesh, onion prices doubled overnight on alarm triggered by Indian authorities’ announcement of the export ban, which came into effect on Friday and is in force until March.
The prospect of a shortage prompted Bangladesh’s state-owned trade corporation to implore Indian authorities to speed up delivery of thousands of tonnes of onions contracted under an existing letter of credit, according to correspondence seen by the Financial Times.
Analysts said India’s measures were a response to unease over stubborn food inflation as Prime Minister Narendra Modi’s government prepares for a general election early next year.
“The concern is how to tame inflation at home, which is not likely to be in a comfortable range, and this process will continue until the elections of 2024,” said Ashok Gulati, an agricultural economist and longtime government policy adviser. “Domestic politics always wins over economics or even international prices.”
At its monetary policy meeting on Friday, the Reserve Bank of India left its benchmark interest rate unchanged at 6.5 per cent in part due to risks from food inflation.
Supply worries have been exacerbated by bad weather, with scientists warning that the annual monsoon — on which many farmers depend for their crops — has become more erratic due to climate change.
For example, authorities expect sugar output in India — the world’s largest producer and consumer — to fall nearly 10 per cent this year. Domestic sugar stocks have already dropped to about only two months’ worth of consumption, below the government’s buffer threshold of three months.
“What we’re seeing is that there are more and more weather events that are taking place, right from heatwaves during March to excess rainfall during the month of July,” said Pushan Sharma, director of research at analytics company Crisil. “These weather events are leading to a lot of price volatility for agricultural commodities.”
India’s latest announcement on sugar, which comes on top of an indefinite export ban, is designed to prevent sugar cane juice or syrup from being used to produce ethanol, which is widely used in fuels. Crisil estimates this will boost sugar production by about 2.5mn tonnes, equivalent to about 10 per cent of this year’s expected output.
Critics argue these interventions are counterproductive for a country that has sought to build up its export market, with India now at risk of losing hard-won customers to its competitors.
The existing restrictions on rice exports, introduced earlier this year, have already pushed up prices globally and threatened to create the worst international shortage in years.
Prakash Naiknavare, managing director of the National Federation of Cooperative Sugar Factories, argued that sugar importers in south-east Asia and Africa that previously bought from India were now likely to source supplies from its main rival, Brazil.
“We’ve created the market, we’ve created the brand image, but unfortunately we’re absent. Brazil will take full advantage.”
