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Farm Truths
The curious case of India’s rising food-price inflation
- Our recent drop in inflation has proven short-lived but it is high food inflation, especially for cereals, that threatens to make matters worse for those who have already been in distress.
Estimates of inflation based on the consumer price index (CPI) released for the month of January by India’s ministry of statistics and programme implementation have put to rest any hope that our fight against inflation is over. The moderation in inflation numbers for November and December was rather short-lived, with inflation back above the Reserve Bank of India’s (RBI) upper bound in January at 6.52%, along with a higher inflation print for rural areas at 6.85%. More than overall inflation, though, it was food inflation that surprised many. While overall consumer food price inflation increased from 4.2% in December to 6% in January, the cereal inflation rate was at more than 16%, the highest since the new series was adopted. And even for cereal inflation, price pressures were more pronounced in rural areas, with rural cereal inflation reported at 17.2%, significantly higher than in urban areas, where that rate was 13.8%.
India’s January inflation numbers were contrary to expectations, but aren’t really all that surprising. There are two characteristics of the recent inflation episode that are particularly worrying.
First, cereal inflation continues to remain a challenge, primarily driven by the price of wheat, but these pressures have now spread to other food items. While wheat prices increased by 25% from a year earlier, a record-high in the last decade, even rice inflation was at 10% amid a rising trend in the last several months. Within food, eggs and milk also reported inflation at 9% and an increasing trend. Egg inflation was negative until October last year, but has jumped sharply since then.
Second, while food inflation continues to remain a challenge, inflation has now spread to other goods and services, making it much more broad-based. Transport and recreation, with a combined weight of around 9-10%, were the only group with an inflation rate of less than 6%. For the rest of the non-food group accounting for more than 50% of the weight in rural areas, inflation was 6% or more, with clothing and footwear at 9.1%, fuel and light at 10.8%, household goods and services at 7.3%, health at 6.4%, personal care at 9.6% and the miscellaneous group at 6.2%.
These disaggregated estimates also raise questions on the nature of the current spell of inflation and the policy response needed to address it. The rural economy is still in distress amid declining agricultural profits and stagnant wages. Worryingly, there is enough evidence to suggest that even the urban middle class is not doing any better. It is not surprising then that rate hikes by RBI have played no role in containing inflation so far. In a demand-constrained economy, more so in case of cereals, which are an essential consumption item, monetary policy is unlikely to be of any help. Unlike developed countries, where food inflation is not much of a concern, given a decline in international prices for most food items, it is cereal and food in general which is really driving Indian inflation.
But then, another question arises. Why have cereals and other commodities been getting dearer at this pace even when there is no rise in incomes and international prices have declined from their peaks? For cereals, there are essentially cost-push pressures, worsened by supply shocks. While cereal prices were rising even before the Ukraine-Russia war, these pressures got strengthened after a poor domestic wheat crop last rabi season due to a heat wave and then a decline in rice production in the kharif crop due to uneven and deficient monsoon rainfall. A part of the blame also lies with the government for ignoring rising wheat-price signals and intervening effectively much later, with an export ban. For eggs and milk, what also contributed were rising fodder prices. These have risen at more than 10% for almost all of 2022, more than 20% since May, with the last three months witnessing 30% inflation. In fact, data from the wholesale price index (WPI) has clearly indicated that cereal and other prices have been on a rising trend since August 2021. Even the overall WPI has been above 10% since April 2021 and it was bound to show up in consumer prices sooner or later.
India’s long spell of food inflation is unlikely to cool down soon. Even the small cushion of free foodgrain of 5kg per person, which was available until December, has been withdrawn. While this is likely to depress demand, it is also likely to put upward pressure on overall price levels. The attempt by the government to draw down Food Corporation of India (FCI) reserves through open market sales has not resulted in lower prices for wheat. The real worry is another year of weak production as a result of another likely heatwave. The stickiness of food inflation, cereal in particular, requires a different response, not just in terms of providing subsidized inputs, but also in protecting standing crops from extreme weather events.
Reducing expenditure on rural development, particularly on India’s employment guarantee scheme and the untimely withdrawal of the free foodgrain scheme, is only going to make the food security situation in the country precarious. While inflation continues to remain a challenge, ensuring food security to millions in distress may be a bigger challenge to deal with.
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First Published:23 Feb 2023, 11:19 PM IST
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