Prices of essential food grains are surging in India, eating into household budgets and hurting consumer sentiment. Cereal prices rose 17.8% in June from 6.6% a year earlier, pushing wholesale price inflation to an uncomfortably high 4.86%. But instead of stepping in to shield consumers, the government is exacerbating the demand-supply mismatch by withholding its stockpiles of food grains. The reason: It doesn’t want to take a loss on its inventory.

The Food Corporation of India had 73.9 million tons of rice and wheat (pdf) in its warehouses at the beginning of July, more than double the minimum buffer requirement at that time of the year. “Unload 15 million tons in the market. You can bring down inflation (cereal prices) from 17% to 5% in 15 days,” says Ashok Gulati, chairman of the Commission for Agricultural Costs and Prices, an agency that advises the government on farm produce prices.

He explains that the government is willing to release the grains only at around the current market prices—1,500 rupees per 100 kilograms ($26 per 220 pounds)—to recover the cost it had to pay when it bought the inventory from farmers. ”If the government is going to release its stock at that price, then open market prices get pushed up, because it is the biggest player,” says Gulati. The Indian government runs a Minimum Support Price scheme to safeguard the interests of the farmers. Under the program it declares minimum prices for various agricultural products that it directly procures from farmers to prevent distress sales.

Ministry of Statistics Price Indices (2004-04 to 2012-13)

What makes government’s laissez faire approach even more perplexing is the fact that it does not even have the necessary infrastructure to store the grains safely. The Food Corporation of India has the capacity to store only 53 million tons in covered warehouses. The rest of the grains will be left out in the open, covered mostly by just tarpaulin. Analysts estimate that about 10% of India’s food rots or is lost before it can be distributed.

In the fiscal year ended March 2013, food prices in India increased 10% year-on-year compared to the 3% rise in the World Bank’s food price index for emerging countries. These spikes in food prices act as a hidden tax on the Indian population. The average household spends almost half of its expenditures on food, while the poor spend around 60%, according to the National Sample Survey Organization. Increases in food prices translate into demand for higher wages, which in turn negatively impacts the government’s finances. In March, Moody’s said high food prices will put downward pressure on the country’s sovereign ratings by slowing growth, increasing inflation and widening deficits.