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ANALYSIS-India's food-price surge to prompt more govt action
* Wholesale prices falling but consumer prices rise
* Food surging; lentil, potato prices have doubled
* Monetary policy powerless to stem supply-side bottlenecks
* Govt likely to step in to curb food price rises
By Saikat Chatterjee and Tony Munroe
MUMBAI, Aug 6 (Reuters) - India's main inflation measure has shown prices falling from year-ago levels for seven straight weeks, but try telling that to Shobha Uttam Vadivale, a 56-year old housewife shopping for produce in central Mumbai.
"The cost of my food basket has gone up twice in the last two to three months. What used to cost 35 rupees a kilo two months back is now 60 rupees a kilo," she said as she bought aubergines and cauliflower at a market in the Dadar neighbourhood.
The surging price of food in India, even as other prices are flat or falling, is unlikely to push the central bank to raise interest rates in the near term as it looks to nurture growth and accommodate a record $90 billion government borrowing programme.
But it is likely to spur action from a government already worried a weak monsoon will hamper growth just as the economy tries to pull out of the global downturn and in the knowledge that high food prices have brought past governments down.
Since the rise in food prices in India is largely a factor of supply constraints, such as poor infrastructure, the vagaries of annual monsoons, and this year the driest June in more than eight decades, tighter monetary policy would do little to help.
"Hiking interest rates is not going to do anything for the price of rice," said Macquarie economist Rajeev Malik.
Indeed, analysts don't expect rates to start rising until January-March 2010 when a recovery in the economy will revive inflation pressures more broadly.
Instead, the government is likely to add further measures to ease food price pressure. It has already limited exports of wheat, wheat products and rice this year to cap domestic prices.
Its first move is often to cut import duties, which it did on Monday when it extended tax-free sugar imports [ID:nDEL402956], and the next step is likely to be further trade controls, such as crackdowns on grain exports, economists say.
India is also taking steps to curb hoarding. Already, authorities in Maharashtra state, where Mumbai is located, have seized sugar as well as small quantities of oil seeds and legumes from traders suspected of hoarding, sources have told Reuters.
Last year, India temporarily banned futures trading in commodities including wheat, rice, vegetable oils and potatoes. If prices rise further, pressure from leftist politicians is likely to grow for a renewed clampdown on futures trading.
Among fiscal moves, India can increase subsidies paid to farmers, but that would add pressure to the government deficit, already expected to be the biggest in 16 years this fiscal year.
It can also dip into grain stockpiles to boost supplies and so cut prices, but that is typically a last resort because it would be seen as undermining the country's food security.
D.K. Joshi, principal economist at ratings agency Crisil, said limited fiscal firepower means India would be reluctant to use fiscal measures unless absolutely necessary.
"They would want to wait and watch and see the severity of the situation before using any fiscal policy instruments," he said.
It won't be the first time that the government has had to intervene to offset soaring food prices.
Wheat imports in 2007/08 were earmarked for India's poorest families, ensuring food supplies to the neediest, but market prices only came down after supplies picked up.
When inflation hit double-digits in 2008, the government cut import duties on edible oils and other food products to ease supplies, and banned grain exports. It took two to three months for consumers to see lower prices, however, in part because other prices, fuel in particular, remained high.
The monsoon is critical. A Reuters poll last month found below-normal rains could lower economic growth this year to 6 percent, while normal and well-distributed rains could promote growth of 6.5 percent or more. GDP rose 6.7 percent last year.
The cost of lentils, a staple legume, has doubled in India in recent months. Sugar is up 40 percent since the start of the year and potatoes have doubled.
High food prices have felled Indian governments in the past. Food accounts for 60 percent of most Indians' disposable incomes and so with elections looming in some states, lawmakers are clamouring for government intervention.
For financial markets, food prices add to the difficulty of tracking inflation.
Food makes up just 18 percent of the most-closely watched wholesale price index but 45 percent to 60 percent of the less-followed consumer price indexes. While the WPI has been falling on a year earlier for seven straight weeks, high food prices have driven up the CPIs between 8 and 11 percent.
Efforts to come up with a more inclusive measure have been slow and a gap between rural and urban incomes and spending patterns adds to the challenge.
"We also need a good index which is representative of the average Indian, but because of the rural/urban divide this is very difficult," said Rupa Rege Nitsure, chief economist at Bank of Baroda.
For now, many hope the monsoon will improve and bring food prices down. That may mean little near-term relief for consumers.
"Rains are good now. If it continues like this for the next two to three months, prices will come down," said a vegetable seller in Mumbai surnamed Hande. But for now, he said, "I can't buy vegetables for my own family, it's so expensive." (Additional reporting by Surojit Gupta in Mumbai; Editing by Neil Fullick)
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