Issue of Food Inflation in India

#### GS Paper 3

Syllabus: Indian Economy

Source: Th

Context: April’s retail inflation data showed a slight slowdown in overall price gains to an 11-month low of 4.83% according to the Consumer Price Index (CPI). However, food price inflation accelerated, reaching a four-month high of 8.7%.

Recent Trends in Overall Inflation and Food Prices:

• Food Price gains were 8.75%for rural consumers, 19 basis points higher than for urban consumers.

• Rural CPI stood at 5.43%, significantly higher than the urban rate of 4.11%.

• Cereals, the heaviest category in food, increased to 8.63%.

• A significant year-on-year increase in the average prices of rice and wheat.

• Vegetables remained in double-digit inflation for the sixth consecutive month, reaching 27.8%due to soaring temperatures.

• Pulses also saw prolonged double-digit inflation, extending to the eleventh month.

• In 2023, while world food prices experienced a significant decline from their 2022 highs, India saw persistently high food inflation, reaching 9.5% in December 2023. This contrasts sharply with global deflation of -10.1%during the same period.

About Inflation in India:

| Description

About | Inflation refers to the overall increase in the prices of goods and services, coupled with a decrease in people’s purchasing power.

Causes of Inflation

1. 1.Demand-Pull Inflation | It occurs when the demand for goods and services surpasses the supply. When there is high overall demand in the economy, consumers are willing to pay more for available goods and services, causing a general increase in prices.
2. 2.Cost-Push Inflation | Cost-push inflation is fueled by a rise in the production costs of goods and services, this can result from factors such as increased incomes, elevated costs of raw materials, or disruptions in the supply chain.
3. 3.Wage-Price Inflation | This form of inflation is often characterized as a feedback loop between wages and prices, when workers demand higher wages, businesses may raise prices to offset the increased labour costs and consequently, workers seek higher wages in response, perpetuating the cycle.

Different Indices for Measuring Food Inflation in India

1. 1.Consumer Price Index (CPI) | CPI for Industrial Workers (IW), CPI for Agricultural Labourer (AL), CPI for Rural Labourer (RL), and CPI for Urban Non-Manual Employees (UNME).
2. 2.Consumer Food Price Inflation (CFPI) | CFPI is a component of the broader Consumer Price Index (CPI), where the Reserve Bank of India (RBI) utilizes the CPI-Combined (CPI-C) for this purpose. It monitors the price fluctuations of a particular selection of food items commonly consumed by households.
3. 3.Wholesale Price Index (WPI) | The WPI tracks changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses. It specifically focuses on goods, and services are not part of it. It is utilized to monitor supply and demand dynamics in industries, manufacturing, and construction sectors.

Components: Primary articles (Food Articles, Non-Food Articles) and other categories like Fuel and Power and manufactured Products.

Food Articles in WPI: Cereals, Paddy, Wheat, Pulses, Vegetables, Fruits, Milk, Eggs, Meat, Fish, Oil Seeds.

Non-Food Articles in WPI: Oil Seeds, Minerals, Crude Petroleum.

Food inflation in India is primarily calculated using the Consumer Price Index (CPI) for Food and Beverages, a key measure tracking price changes of a typical consumer basket. Food carries a weight of 45.9% in the CPI, but its contribution to overall inflation has risen from 48% in April 2022 to 67% in November 2023.

Recent data from the government’s Household Consumption Survey indicates a decline in food’s share of the consumption basket, dropping below 50% for rural consumers and 39% for urban consumers.

Factors contributing to the drop in global food prices include:

• An abundant supply of key crops: Bumper harvests in 2023, particularly of wheat, resulted in a surplus in the global market, contrasting with concerns over supply disruptions in 2022.

• Improved supply from Russia and Ukraine: Despite disruptions, both countries maintained wheat exports, easing supply anxieties.

• Lower demand for vegetable oils: Increased vegetable oil supplies and reduced use for biofuel production led to an approx. 32% drop in the UN’s Vegetable Price Index.

• Slowing demand: High inflation and economic recession fears reduced consumer demand, particularly in major food-importing regions, decreasing import demand and lowering global prices.

India’s high food inflation amid falling global food prices can be attributed to several factors:

• Limited transmission of global prices: While world food prices decreased, India’s remained elevated due to limited transmission of international prices to domestic markets, except for edible oils and pulses.

• Export bans and import duties: The Indian government imposed bans on certain food exports and provided import duty waivers, reducing global market influences on domestic prices.

• Domestic production challenges: Weather conditions affecting crop yields, particularly for cereals, pulses, and sugar, contributed to supply shortages and higher prices domestically.

• Low stock levels: Low stock levels for commodities like wheat and sugar exacerbated price pressures.

Other Factors Contributing to India’s Elevated Food Inflation:

Factors | Examples

Temperature and Weather Challenges | Adverse weather conditions, such as weak monsoon predictions and heatwaves affecting crop yields, particularly for cereals, pulses, and sugar, contribute to supply shortages and higher prices domestically.

For example, cereal and pulse inflation showed double-digit inflation in April 2024.

Changing preferences | Increasing demand for proteins, processed & packaged foods facing structural shortages. Per capita milk consumption up from 307 grams in 2013 to 427 grams in 2020.

Fuel Prices | The increase in fuel prices, a key input in agriculture, has led to higher production costs.

For instance, a 1% increase in fuel inflation results in a 0.13% rise in food inflation, with the effect declining gradually over the next 12 months.

Supply Chain Disruptions | Disruptions in the supply chain, including transportation constraints, labour shortages, and logistical challenges, decrease the availability of food products, causing prices to rise.

For example, vegetables continued to experience double-digit inflation due to inefficient storage facilities leading to perishable item wastage.

Global Effect | Despite global food price decreases, India’s food prices remain high due to limited transmission of international prices to domestic markets.

The Russia-Ukraine war has acted as a deterrent, and while India heavily depends on imports for edible oils and pulses, it is a net exporter of commodities like cereals, sugar, dairy, fruits, and vegetables.

What makes controlling food inflation challenging in India?

• Multi-dimensional factors requiring coordinated policy response across fiscal, monetary, and trade – food inflation is influenced by global commodities, domestic supply constraints, changing preferences etc.

• The slow pace of structural reforms in agriculture marketing, storage and transport – APMC Act modernization across states still a work in progress. Food Corporation of India suffers infrastructure deficiencies.

• External headwinds like energy costs beyond India’s control – 50% rise in global crude prices in 2021 transmitted to domestic inflation.

• Increasing climate risks makes agricultural output unpredictable – Deficient rains in 2014-15 and 2015-16 affected production,

• Considerations around impact on vulnerable groups like farmers, urban poor – Requires balancing inflation control with protecting incomes and consumption. For example – Farm loan waivers provided despite inflation concerns.

• For example – Farm loan waivers provided despite inflation concerns.

Impact on the vulnerable population

• Poor households spend over 50% of income on food, hence highly vulnerable to food inflation. Bottom 20% income group faces food inflation of ~6% currently.

• Can push more households into poverty– Declining real incomes and loss of purchasing power as food dominates expenditure.

• Shift towards lower quality and quantity food consumption resulting in worsening nutritional outcomes. Rise in anemia, stunting indicators likely.

• Rural landless laborers and marginal farmers heavily affected due to dip in rural wage growth and crop realization prices. Loss of livelihoods.

• Urban poor impacted as social security nets are inadequate. May cut essential spending on health and education.

Government steps to curb inflation:

• Subsidized Commodities: Government increases distribution of subsidized vegetables like onions and tomatoes, releases stocks of wheat and sugar to stabilize prices.

• Reduction in Import Duty: Incentivizing pulse cultivation among farmers, reducing import duties on certain pulses to boost local availability.

• Export Bans: Bans on wheat exports since May 2022 and on broken rice exports since September 2022 to maintain ample domestic supply and lower prices.

• Ban on Stockpiling: Regulations limit wheat stocks to 3,000 tonnes for traders, millers, wholesalers, and retail chains, and 10 tonnes for smaller retailers and shops to prevent excessive stockpiling.

• Operation Greens: Aims to stabilize Tomato, Onion, and Potato (TOP) crop supplies throughout the year across the country to minimize price fluctuations.

• Floor Prices: Imposing a minimum export price (MEP) of $800 per tonne (₹67 per kg) on onion exports from October 29 to December 31, 2023, amid rising onion prices due to delayed kharif onion arrivals.

Recommendations by the ICRIER paper for containing food Inflation: Click Here

Conclusion

Tackling food inflation needs a calibrated monetary response, investments in agriculture, stable trade policies and expanded social safety nets to protect the vulnerable like urban poor and landless rural households. Global cooperation on supplies and trade will also strengthen long-term price stability.

Insta links:

• India’s High Food Inflation

Mains Link:

Q.There is also a point of view that Agricultural Produce Market Committees (APMCs) set up under the State Acts have not only impeded the development of agriculture but also have been the cause of food inflation in India. Critically examine. (UPSC 2014)

Prelims Links

Q.1 Consider the following statements: (UPSC 2020)

• The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI).

• The WPI does not capture changes in the prices of services, which CPI does.

• The Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates.

Which of the statements given above is/are correct?

(a) 1 and 2 only (b) 2 only (c) 3 only (d) 1, 2 and 3

Ans: (a)

Q 2. If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do? (UPSC 2020)

• Cut and optimize the Statutory Liquidity Ratio

• Increase the Marginal Standing Facility Rate

• Cut the Bank Rate and Repo Rate

Select the correct answer using the code given below:

• 1 and 2 only

• 1 and 3 only

• 1, 2 and 3

Ans: B