By Debiprasad Nayak

  Of DOW JONES NEWSWIRES


  MUMBAI (Dow Jones)--With 167 of India's 626 administrative districts
declaring a drought this year,  prices of staple foods have risen by an average
30% and as much as 40% in some cases.

  The government wants imports to help bridge the domestic supply gap and rein
in prices, but that may be easier said than done. Efforts to encourage imports
so far have had limited success because of higher international prices while
what is seen by many as a last resort - subsidizing imports - could drive up
prices even further, making imports more difficult.

  "It's a double blow to the government this year. Poor monsoon, coupled with
rising global prices have put policy makers in a dilemma," said Harish
Galipelli, head of research at JRG Wealth Management.

  The government may give more import incentives but that may not work, as any
new incentive will only push world prices even higher, said Sanjay Tapriya,
director of finance at Simbhaoli Sugar Mills Ltd., a leading sugar producer in
the country.

  India faced a similar situation in 2006-07 and 2007-08, when a decision to
import as much as 7 million tons of wheat amid falling domestic stocks pushed
up international prices so much that the country was left paying an import
price of INR16,000 per ton by the time the program ended, compared with a price
of around INR8,000/ton at the start of the program.

  Sure enough, prices rose also because of other factors such as tight global
supply, but India's decision to enter the market after a gap of nearly six
years was seen as a major catalyst for the sudden surge in prices.

  Prime Minister Manmohan Singh has said the government is ready to undertake
open market intervention again to prevent the rise in domestic prices caused by
insufficient rains.

  "We need to be aware of the possibility that reduced production of kharif
(summer-sown) crops in the current year may have an inflationary impact on
prices of food items in the coming months," Singh said at a special meeting of
federal and provincial officials earlier this week. "We should not hesitate to
take strong measures and intervene in the market if the need were to arise."

  India's Meteorological  Department has estimated that rainfall during the
June-September monsoon season this year will be substantially below long-term
average, severely reducing plantings and damaging standing crop in many parts
of the country. Rainfall was 29% below average as of Aug. 11.

  Analysts have said the country may face the worst drought in 50 years if
rainfall remains weak during the rest of the season. Monsoon rains in June were
the lowest in 83 years.

  "A continuation of status quo in the remaining weeks of this monsoon season
will lead to a severe drought in 2009," rating agency Crisil said this week.

  "In our assessment, a fifth of the country is reeling under drought
conditions," brokerage Kotak Securities said in a report, forecasting an 18%
fall in summer-sown food grain production and a 13% drop in total food grain
output in 2009-10.

  Morgan Stanley has halved its earlier forecast of India's agricultural growth
to 1.5% in fiscal 2009-10 although the government is yet to officially revise
its target of a 4% growth in agriculture production this year.

  According to federal farm ministry, the area under paddy cultivation has
fallen 20% this year to 22.82 million hectares. The wheat crop, which is mainly
winter-sown, may also be affected due to insufficient soil moisture, according
to analysts.

  Sugar cane acreage is down at 4.3 million hectares as of Aug. 6, compared
with 4.4 million hectares at the same time last year. Sugar production in the
current crop year ending September 30 is estimated to be 14 million to 15
million tons, down sharply from 26.3 million tons in the previous year.

  Production of pulses could fall by 11% to 13 million tons in 2009-10 while
demand is estimated to be 17-18 million tons.

  Domestic sugar prices have risen almost 40% to INR2,800/100 kilo grams in the
last six months while prices of pulses have risen by 20% to 40%.

  Even wheat and rice haven't been spared despite the country having ample
stocks of both the grains following two bumper crops.

  Wheat prices in the spot market, for example, have risen to INR1,175/100 kg
from INR1,110/100 kg in just a month. "There is hardly any wheat left with the
private trade in the open market," said Ajay Goyal, president of the
Maharashtra Flour Millers Association.

  The price of rice has risen by 10% to 15% in the last three months.

   Private Traders Seek Subsidy To Support Imports


  The federal government, which has already announced a slew of measures such
as allowing duty-free import of sugar and pulses until March 2010 and
re-imposition of export restrictions on most agriculture products, may be
forced to take further measures to ease the pressure on prices.

  Industry officials said they expect the government to release up to 2 million
tons of wheat from government stocks before the start of the September-October
festival season.

  The government is also expected to allow state-run trading companies to
import an additional 1 million tons of edible oils at zero duty until March
2010, to boost local supply.

  India, one of the largest consumers of edible oils in the world, already
imports nearly half its annual consumption of 15 million tons from Brazil,
Argentina, Malaysia and Indonesia.

  "State-run companies importing 1 million tons of edible oil will add to the
buoyancy in the international market," said Davish Jain, president of the
Central Organization for Oil Industry and Trade.

  Increased demand is already pushing up the global prices of many of these
commodities.

  Raw sugar futures traded on the Inter-Continental Exchange, for example, have
climbed to a 28-year high.  "Sugar millers are hesitant to buy at such high
prices," said Tapriya of Simbhaoli Sugar Mill.

  Rising international prices have also affected the import of pulses, which
slowed to 2.57 million tons in  2008-09, from 2.95 million tons in the previous
year, according to Agriculture Minister Sharad Pawar.

  The landed cost of imported pigeon pea has increased by 20% to INR5,000/100
kg in the last six months, said K.C. Bhartiya, president of the Pulses
Importers Association of India.

  "I don't think imports will help cool domestic prices. As imports are so
costly, domestic prices will remain strong," said Naveen Mathur, associate
director at Angel Commodities, a commodities brokerage firm in Mumbai.

  The government has to provide subsidies to private traders on the lines of
what it does for state-run importers, to ensure sufficient imports, Bhartiya
said.

  The government provides a 15% subsidy to state-run importers such as National
Agricultural Cooperative Marketing Federation, MMTC Ltd. (513377.BY), State
Trading Corp. (512531.BY) and PEC Ltd. which currently import pulses.

  Since July, state-run companies have issued tenders to buy more than 200,000
tons of pulses and private traders are planning to import another 400,000 tons
over the next three months.

  But the country may need to import 3 million tons of pulses in 2009-10 to
meet local demand, Bhartiya said. India is the biggest consumer of sugar and
pulses.