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Retail food inflation climbed to 14% in December, the highest in six years. Given gross domestic product growth slowed down to just 5%, this has stoked fears of stagflation
Retail food inflation climbed to 14% in December, the highest in six years. Given gross domestic product growth slowed down to just 5%, this has stoked fears of stagflation

Why food inflation may turn sticky

  • Despite the slowdown in rural demand, the spike in food prices is not showing any signs of cooling. Here’s why
  • This is the best time for the budget to address the volatility in food prices. Reliable market intelligence on crop production and timely advisories to farmers can help stabilize prices

New Delhi: For more than five years now, the Indian countryside has only heard stories of anguish. Consecutive years of drought in 2014 and 2015 gave way to record harvests in the years that followed, leading to an unprecedented crash in farm gate prices—from pulses to potatoes, farmers repeatedly harvested losses.

Ripe tomatoes were left to wither away in fields; marginal farmers sold pulses at rates lower than support prices announced by the government; onions and potatoes were dumped by the roadside; dairy farmers emptied out cans of milk on highways, complaining that milk was selling cheaper than bottled water. Why, hapless farmers drove tractors over their ready-to-harvest crop fields; five died in police firing in the summer of 2017 as protests turned violent in Madhya Pradesh.

Suddenly, this protracted period of low food prices—Consumer food price inflation fell to an abysmal 0.1% in 2018-19—was broken. The culprit: excess rains between September and November last year. Crops like pulses, onions, potatoes and soya bean suffered heavy damage in states like Madhya Pradesh, Maharashtra, Karnataka and Rajasthan.

Retail food inflation climbed up from 3% in August 2019 to 10% in November and rose further to 14% in December 2019, the highest in six years. Much of this hike was driven by a year-on-year rise in prices of vegetables (60%), pulses (15%) and animal proteins (9%). This double-digit inflation at a time when GDP growth slowed down to just 5% has stoked fears of stagflation (high inflation combined with stagnant demand).

Obviously, the big question on everyone’s mind is whether this rise in food prices is transitory—or not?

Apart from the obvious impact on consumers and farmers, the spike in food inflation also raises some important systemic questions. What has been the role of the government’s reaction to volatility in food prices? Could better coordination have helped avert the spike in inflation? And finally, doesn’t this freak weather event burst the myth that India had turned into a food surplus nation?

The price of potato—the most widely used vegetable—is likely to remain high due to lower area under the crop in key states and damage due to excessive rains
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The price of potato—the most widely used vegetable—is likely to remain high due to lower area under the crop in key states and damage due to excessive rains

Inflation hawk down

While there is little dispute that the latest spike in inflation is driven by supply shocks following excessive rains, the agriculture ministry is yet to reveal the extent of production loss. Food inflation is the most volatile component in retail inflation and therefore difficult to anticipate, said Dharmakirti Joshi, chief economist at rating agency Crisil Ltd. According to Joshi while onion prices are cooling, proteins like milk, meat, eggs and pulses may be a cause for worry.

There are global factors too. “Global food prices at a five-year high (take, for instance, edible oil, where India is a large importer and is currently engaged in a war of words with Malaysia) is also likely to have a bearing," Joshi said, adding, “Food inflation was benign till 2018-19 and that is reversing now and prices are likely to stabilise at higher levels. But 4-5% inflation in food is desirable, otherwise the farmer gets the short end of the stick. It isn’t good when rising costs in farming does not reflect in crop prices."

Also, higher inflationary expectations (as shown by data from the Reserve Bank of India) may have a bearing on food prices. Even when demand is subdued, prices can rise on the back of expectations. If prices are expected to rise, traders and large farmers will hold on to non-perishable stocks which may lead to higher prices in future. “Therefore, it is unlikely that retail food inflation will come down to single-digit levels before April/May," warned Himanshu, associate professor of economics at Jawaharlal Nehru University (JNU), Delhi.

A more worrying aspect of the current spike in food prices is that it has come despite a slowdown in demand, especially in rural areas. A leaked National Statistical Office consumption survey report, which the government junked in November 2019, showed that rural consumption, including expenditure on staples, fell by 9% between 2011-12 and 2017-18. The poor are evidently consuming less than they did a decade back.

Since the Narendra Modi government stormed to power in 2014, it has been hawk-eyed on food inflation. Even in a widespread drought year, retail food inflation was limited to 5% in 2015-16 and dropped to 1.8% in 2017-18 and 0.14% in 2018-19. This had disastrous consequences for farmers, who were pacified through loan waivers and direct cash transfer schemes timed to elections. India moved to a low interest regime (as per its monetary policy goals) but farmers had to pay a heavy price. “Annual food inflation around 7% is actually desirable for farmers to stay in business," said Ajay Vir Jakhar, chairman of Bharat Krishak Samaj, a farm advocacy body.

Onions, Potatoes, milk

The government’s reaction has compounded problems. For instance, the food ministry reacted to rising onion prices (wholesale onion prices rose by a staggering 456% year-on-year) and ordered imports in November.

But now, after the late kharif crop arrived in the markets, the government is saddled with a stock of imported onions that states are unwilling to lift. Clearly, better communication between the food and agriculture ministries, housed in the same building in the national capital, could have led to better planning.

A closer look at the Consumer Price Index food basket show that cooling vegetable prices—onions are now selling at 70 a kg compared to 130 a month ago—may not be enough.

The price of potato—the most widely used vegetable in the Indian kitchen (and far more crucial for the rural poor than onions)—is likely to remain high due to lower area under the crop in key states, and damage due to excessive rains. Potatoes are now retailing in Delhi at around 28 per kg, nearly double the price last year. Wholesale inflation in the tuber shot up to 45% in December after remaining in negative territory since July. It is unlikely that it will come down to 10-15 a kg levels like last year.

When it comes to pulses, the situation is more worrying. Large crop losses in kharif pulses such as moong, arhar and urad, and the consequent rise in prices cannot be wished away by a record crop of winter chickpeas (chana) that will be harvested in April.

Not only is the winter crop months away from harvest and therefore prone to adverse weather risks, prices are likely to climb higher since one pulse variety is not easily replaced by another in the Indian kitchen. For instance, chana cannot be substituted by pigeon peas (arhar) in sambhar, a staple dish in southern states.

Like onions, here too, the agriculture ministry is yet to reveal the extent of damage. The National Bulk Handling Corporation Pvt. Ltd estimated in January that year-on-year production of moong will likely to drop by 27% alongside urad (18%) and arhar (10%). The two million tonnes of stocks held by government agencies like could be a lifesaver to tame inflation in the coming months.

There will be no such solace in the case of milk prices. After a gap of nearly two years, milk is dearer by up to 10 per litre due to rising prices of cattle feed and a likely reduction in herd size. Sustained low prices mean farmers not only underfed their cattle but also reduced the number of cattle they reared.

A complete ban on cow slaughter and rising risks in the trade of spent cattle (including buffaloes, where legal culling for meat is allowed) deprived farmers of the end-of-life value they earned earlier. This meant a loss of around 10,000 per animal, which was earlier invested in purchase of new in-milk animals.

A delayed impact of these factors is now showing up in higher prices of dairy products, from milk to processed items like curd and cheese. “Milk prices are unlikely to come down within the next one year (assuming the government does not allow cheaper imports)…due to unfavourable government policies dairy farmers have cut down on cattle while higher fodder prices alone added 3 per litre to milk prices," said Jakhar of Bharat Krishak Samaj.

Overflowing granaries

The cereal component of retail food inflation has apparently been the most benign. Retail prices of cereals like rice and wheat rose by 4.4% year-on-year in December but this too could see a spike in the coming months. The Food Corporation of India is currently sitting on a stock of 75 million tonnes of rice and wheat compared to operational (required to run the food subsidy scheme) and strategic reserve norm of 21 million tonnes in early January.

The rise in government procurement of wheat from farmers (ahead of the general election in May-June) pushed wholesale prices by over 8% over the past year, said JNU’s Himanshu. When wheat becomes expensive, it pushes up consumption of coarse cereals (where prices have shot up by 16-32%). The way out is to release the excess stocks though the public distribution system (PDS). “This will tame prices but lead to a higher fiscal deficit," he said. However, with the budget round the corner, this is unlikely.

In general, this crisis raises questions about the notion that agricultural production is in surplus territory and casts a doubt over the assertion that India could emerge as an export powerhouse of farm products. There is little disagreement among experts that a stable price regime is beneficial to both growers and consumers. The way to achieve this is by reducing the recurrent volatility in prices of perishables like onions, potatoes and tomatoes.

Reliable market intelligence on crop production and timely advisories to farmers, coupled with better processing and supply-chain management, can stabilize prices at the farm-gate level. Currently, a tomato grower in Haryana has no idea what farmers in Karnataka are planting; their only cue is past season’s prices. As things stand, the spike in onion prices implies an impending fall driven by overproduction.

However, the government is not tackling all of this. It is preoccupied with firefighting: these include sudden changes in trade policy like imposing export bans and raiding warehouses of wholesalers to bring down consumer prices. But it is rare to see measures to support farmers when prices of perishables crash.

In non-perishables, the time is ripe to expand the scope of the National Food Security Act by increasing household quota of subsidized cereals and also adding pulses, said JNU’s Himanshu.

A move to include pulses under PDS has other benefits, besides price stability: it can wean farmers away from water-guzzling crops and is therefore environment-friendly; it can also radically improve the dismal nutritional standards in rural households. Recent ground reports by Mint showed that both pulses and vegetables are missing from the rural diet. The poor are mostly surviving on a diet of subsidized cereals

This is also the best time for the forthcoming budget to address the volatility in food prices, something that monetary policy cannot address. Last year’s budget had pinned its hopes on “zero-budget natural farming" to take Indian agriculture ahead. Clearly, there are more pressing areas crying for attention.

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