Maharashtra Economic Development Council महाराष्ट्र आर्थिक विकास मंडळ

Food Inflation in India: An Assessment

November 16, 2017 | Dr. R K Pattnaik (Professor at SPJIMR, Mumbai)

Introduction

There is a broad consensus among the academics and policy makers that the economy should maintain a low and stable inflation rate in order to sustain a high level of growth and maximize social welfare. In India, the overarching objective of monetary policy conducted by the Reserve Bank of India is to maintain price stability, keeping in mind growth. The aftermath of the 2008 financial crisis witnessed a moderation of growth accompanied by high and uncomfortable level of inflation rate. More recently, inflation rate has recorded a downward movement. Reflecting on this, the Economic survey of the Government of India, August 2017, has observed that “The Economy has undergone a transition- possibly structural and permanent- from high to low inflation in the last three years.” The survey further commented that food inflation, which was the main driver of inflation in the past, declined significantly during this period because of improvements in supply of pulses and vegetables on the back of a normal monsoon. Thus, the survey opines that India is undergoing a structural shift in the inflationary process toward low inflation. Anecdotal evidences, however, reveal that the vegetable prices are high and sticky and thus one may question the sustainability of lower food inflation witnessed currently in terms of official data.

Against the above backdrop, the present article makes an attempt to delve in to various aspects of food inflation India Accordingly, the remainder of the article has been organized as follows: section 2 presents an analysis of food inflation. The emerging issues are set out in section 3. Concluding observations are in section4.

2. Analysis of Food inflation

2.1 Weighted contribution of sub groups General CPI and Food Inflation

Following the Patel Committee recommendations, the inflation rate as measured by Consumer Price Index Combined (CPI –C) has been the official inflation rate as agreed by the government and RBI since April 2014. The Central Statistical Office (CSO) has been releasing the data with the base year 2012. The decomposition of CPI inflation reveals that the food component has the highest weightage of 45.86%, followed by services inflation represented through ‘‘miscellaneous’ with a weight of 28.32%, and housing with 10.07%. The CPI data also contains rural and urban retail inflation coupled with a breakup of the state wise data.

The weightage contribution of various sub groups under the food component is given in table 1.

2.2 Trends in Retail Inflation: General and Food

A perusal of Graph 1 through Graph 5 draws the following conclusions.

There has been a co-movement in the food and general inflation. Food inflation was at its peak level of 16.65 in November 2013.
The subgroup trend of food inflation reveals that Pulses, Cereals, Vegetables and Animal Protein contributed to high food inflation.
The gap between rural and urban increased sharply whenever there was increase in food inflation and vice versa.
Recent trends show that, there has been a deflationary trend in vegetables and pulses resulting in lower food inflation rate.
The general CPI Inflation (Headline) has recorded a reduction to the extent of 1.5% in June 2017 and in the neighborhood of 2% in July 2017.

Graph 1- Trends in General Inflation and Food Inflation

The trends in cereal inflation, vegetable inflation and pulses inflation as components of food inflation are given in Graph2 and Graph 3.

Graph 2- Trends in Food and Cereals Inflation

Graph 3- Trends in Food, Pulses and Vegetables

Graph 4 - Trends in Animal Protein Inflation

Graph 5 - Trends in Rural and Urban Inflation

2.3 Episodic Analysis

The government and RBI have adopted a Flexible Inflation Targeting since August 5, 2016. Accordingly, the inflation target till March 31, 2021, will be as under:

Inflation Target: Four per cent.

Upper tolerance level: Six per cent.

Lower tolerance level: Two per cent.

Based on the targets, an attempt was made to undertake an episodic analysis of General and Food Inflation with double digits (> 10%), between 6% and 10%, within the target of 2% and 6%, and below 2%.

The episodes of food inflation as set out in table 2 through table 5, reveal that the food inflation was not only at a very high level (double digit and more than 6%) but also persistent for a long period from June 2012 to August 2016. The peak level was at 16.65 in November 2013.

2.4 Food Inflation: Volatility Analysis

The volatility analysis of food inflation and its major components are given in Table 6 through Table 9. As it may be seen from the tables, food inflation and its components have recorded high volatility.

3. Issues

From the foregoing, it may be concluded that vegetables, pulses, and cereals have been major drivers of high food inflation. As mentioned in various Monetary Policy Reports (MPR) of the RBI. However, prices of protein-rich items (eggs, fish, meat, milk and pulses) exhibited downward rigidity, reflecting structural mismatches between demand and supply.Inflation in other protein-rich items like meat, fish and milk as well as spices and prepared meals exhibited persistent price pressures emanating from demand supply mismatches, given that the demand for these items is relatively income elastic.

3.1 Pulses Inflation

Prices of pulses rose by double digitsfrom February 2015 to September 2016 because of a production shortfall in the previous year, imparting inflexibility to food. The RBI Monetary Policy Reports in this context has observed that “The recurrence of high pulses inflation reflects the structural gap in availability relative to demand. India is the largest producer and consumer of pulses, with cross-border trade accounting for nearly 15 per cent of India’s annual production. The focus of agricultural research needs to shift urgently to pulses with emphasis on developing short-duration pest and disease-resistant varieties, seed multiplication and measures to boost crop yield so as to start off India’s second green revolution.”

3.2 Demonetization

The MPR of October 2016 observed that the shock of demonetization, however, veered the inflation trajectory sharply below its projected path, essentially on account of an abrupt compression in food inflation. Prices of vegetables sank into deflation and pulled down headline inflation during November 2016-January 2017 period. Headline inflation fell off its July cliff and was already traversing a declining trajectory during the months of August to October when demonetization hit in November. It triggered a downward spiral that took inflation down to 3.2 per cent in January 2017, an all-time low in the history of all India CPI-Combined.

The MPR further suggested that, prices of perishables played the most decisive role, even during the three months preceding demonetization. In the months immediately following demonetization, perishables became even more prominent, with vegetable price movements becoming pivotal after a decline of 21 per cent during November 2016 to February 2017. Transactions in fruits and vegetables have always been cash intensive. Anecdotal evidence points to distress sales by farmers, given their perishable nature. Vegetable prices usually do exhibit a seasonal moderation from November to February every year; during the 2016-17 season, however, the decline in vegetable prices was more pronounced than in previous years.

3.3 Vegetable inflation

A topic of heated debated in the recent past is the fluctuating price of tomatoes.To understand the vegetable market pricing an enquiry was conducted by us on the prices of Tomato. The prices in Mumbai, which were Rs. 10-12 per kg in October 2016, stand at a whopping Rs. 80 a kg as of when this article was written. The buck has been passed through several factors from November's demonetization to the farmers' strike in June as well as "inclement weather". According to the trend in the prices these past years, a U turn in the graph could be expected and prices should stabilize soon.For essential items such as tomatoes, no amount of consumer resistance tilts the market as there is a steady demand for the produce.Due to the information symmetry (through mobile network) which exists, the food products are sold at the same rate throughout the country.

3.4 Low Food Inflation

Inflation in India is driven by food prices and the recent low food inflation is a welcome step. However, it may be noted that the low pulses and vegetable inflation has been, on account of base effects (higher level of corresponding previous period). Notwithstanding this,low inflation has also been guided by good production, import, and better supply management. Reduction in food inflation is helpful and relief to the poor. However, the sustainability of the same is a critical issue.

3.5 Food Management

Food management is a critical issue for sustaining lower food inflation. This includes procurement of food grains from farmers at regulatory prices, distribution of food grain to consumers- particularly poorer section- and maintenance of food buffers for food security and price stability. The National Food Security Act 2013 is an important initiative for the food security of the people. An Act is now being implemented in all states and UTs covering 80.54 crore persons.

4. Concluding Observations

Over the years there has been a dramatic change in the nature and composition of food inflation in India in line with the paradigm shift to dietary habits. This has resulted in higher consumption of protein, leading to protein inflation. The supply response has been weak and inadequate. Improved and modern technology and mechanization would be helpful for productivity.It is important to consider the following suggestions put forth by former RBI Governor Dr. RaghuramRajan in a speech made on February 26, 2014 at Mumbai:

Contain the rise in wages elsewhere so that relative wages in agriculture can rise without too much overall increase in wages.
Contain any unwarranted rise in rural wages as well as the rise in other agricultural input costs (though not through subsidies) so that the farmer gets a higher return.
Allow food prices to be determined by the market and use minimum support prices to provide only a lower level of support so that production decisions do not get distorted or the price wage spiral.
Reduce the wedge between what the farmer gets and what is paid by the household by reducing the role, number, and monopoly power of middlemen (amend APMC Acts), as well as by improving logistics.

To conclude, the authors believe that India’s fight against inflation will have traction, over and above the fact that food is, and always will be an integral component of CPI.

Food Inflation in India: An Assessment

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