Onion could be holding India’s economy hostage

This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.

Poor weather has been behind much of the havoc. The drought last year and the ongoing heatwave, which CNBC has previously reported on, have disrupted the supply of staple foods such as grains and vegetables.

Temperatures in large parts of the country are about 4 to 9 degrees Celsius (7.2 to 16.2 Fahrenheit) above average for this time of the year. The high heat has spoilt large amounts of recently harvested and stored vegetables and is threatening to stop the planting of a fresh batch of crops.

Food prices, which rose an annual 8.7% in both April and May, account for nearly half of the overall consumer price basket. The sharp rise in the cost of food has kept headline inflation above the central bank’s target of 4%, preventing it from cutting interest rates.

“The Indian economy remains hostage to intersecting food price shocks,” Michael Patra, deputy governor of the Reserve Bank of India, said in his statement at the latest monetary policy meeting. “Food prices are holding back any consideration of possible changes in the monetary policy stance,” he added.

Keeping rates elevated, though, appears to be “an unacceptably high growth sacrifice,” according to Jayanth Varma, another member of the central bank’s monetary policy committee, who voted to cut rates. Politically, an economic slowdown is unlikely to bode well for the newly elected BJP-led coalition government.

The anxiety was palpable this week when the government announced limits on traders stockpiling wheat.

“Imposing stock limits was just one option. We have many other tools at our disposal to ensure that wheat prices do not rise abnormally,” food secretary Sanjeev Chopra told reporters and added that there was no shortage of wheat in the country.

The government also has the option to remove import taxes — currently set at 40% on wheat — to hold prices down.

Yet, Prime Minister Narendra Modi is stuck in a bind if he wants to gain favor with the country’s farmers ahead of elections in two large agricultural states scheduled for later this year.

Lowering tariffs would enable grains to be imported from wherever they are cheaper and bring down their cost within India, but it will also undercut profits for local farmers.

For now, the prime minister has instead opted to raise the price the government is willing to pay farmers by 5.4% to about $275 per metric ton of rice. These grains are then redistributed to low-income families at no cost, making it the world’s biggest food welfare program.

There are signs that these cost pressures are unlikely to abate soon due to further bad weather. This week, at least 200,000 people have been affected by the floods in India’s northeastern region, a key rice-growing area.

But, an elevated inflation and interest rate environment haven’t appeared to deter companies or investors.

“You talk to Indian companies, and even with inflation at 6%, they barely bat an eyelid because they’re growing at twice that or more,” said James Thom, lead fund manager of the abrdn New India Investment Trust, which trades like an ETF in London. “[They] are used to operating with that level of inflation for decades.”

“That’s just the norm,” he added.

Apple’s India supplier allegedly excluded married women from jobs. Prime Minister Narendra Modi has asked a government department to look into reports that Apple supplier Foxconn rejected married women from iPhone assembly jobs in the country. Foxconn hiring agents and HR sources interviewed by the Reuters news agency cited family duties, pregnancy and higher absenteeism as reasons why Foxconn did not hire married women at the plant. Foxconn said it “vigorously refutes” those allegations.

S&P upgrades Adani Ports, predicts resilient earnings growth. The credit ratings agency lifted its outlook on Adani Ports & SEZ from neutral to positive, saying the company will likely see resilient earnings growth and cash flow. Adani Ports’ shares have risen nearly three times since the low it hit after the release of an explosive report by short-seller Hindenburg.

‘One of the cheapest ways’ to invest in India’s infrastructure boom. Infrastructure spending is rising, and Causeway Capital Management’s Arjun Jayaraman is bullish on one pure-play infrastructure stock [subscriber content] which is predicted to benefit significantly. Jayaraman also believes the stock is “very low risk” as it is a state-owned enterprise.

U.S. diplomat says America needs more Indian students for sciences. Kurt Campbell, the deputy secretary of state, said U.S. universities should welcome more students from India to study sciences, and not from China. He noted that colleges were limiting Chinese students’ access to sensitive technology given security concerns.

Indian stocks are on track for the best monthly gain this year. The Nifty 50 index closed above 24,000 points for the first time as it heads for a 2% gain this week. The index has risen 10% this year.

The benchmark 10-year Indian government bond yield has ticked up slightly to just under the 7% mark and is back to where it was two weeks ago.

On CNBC TV this week, Amish Shah, head of India research at Bank of America, said that if the Indian government decides to allocate more money toward capital expenditure rather than increase welfare spending in its upcoming budget, it could trigger a stock market rally. BofA expects the Nifty 50 index to rise to 24,500 points.

Meanwhile, Neeraj Aggarwal, Asia-Pacific chair of Boston Consulting Group, said that India’s gain from the world diversifying away from China is still early. However, he added that “a lot more work needs to be done” by the Indian government to promote manufacturing and the creation of jobs.