Recent Food Inflation in India – Reasons, Impacts, and Government Measures

Context:

• This article is based on the news “Ashok Gulati writes: How we tame food inflation, and at whose cost” Which was published in the Indian Express. With several state elections in the coming months, it is apparent that the central government is making efforts to curb food inflation to prevent inflation from becoming a focal point in election campaigns.

Food Inflation in India – Latest Update

• India’s food inflation rose up to a 41-month high of 11.5 per cent in July 2023. It has come down to 9.9 per in August, 2023. 

What is the Consumer Food Price Inflation (CFPI)?

• It is a measure of inflation which focuses exclusively on the price changes of food items in a consumer’s basket of goods and services.
• Consumer Food Price Index: It  is a measure of change in retail prices of food products consumed by a defined population group in a given area with reference to a base year.
• Like Consumer Price Index (CPI), the CFPI is also calculated on a monthly basis and methodology remains the same as CPI. The base year presently used is 2012.
  • CPI is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Presently the consumer price indices compiled in India are CPI for Industrial workers CPI (IW), CPI for Agricultural Labourers CPI (AL) and; Rural Labourers CPI(RL) and (Urban), and CPI(Rural).
• CFPI (Rural/ Urban/ Combined) is compiled as the weighted average of the Cereals and Products sub group of CPI for each of those categories – Rural/ Urban/ Combined. Modified weights of these Sub-groups within CFPI are as follows:

What are the reasons for food inflation in India?

• International Prices and Trade Policy: After adoption of Liberalization, Privatisation and Globalization reforms, agricultural markets in India have been progressively integrating with global markets. 
  • Consequently, a shift in international food prices exert direct and indirect influence on domestic markets through trade as well as through policy adjustments.
  • For Example:  India’s agriculture sector witnessed greater integration with the global market, with the share of agriculture trade to agriculture GDP rising from 5.2% in 1990-91 to 19% in 2013-14. 
• Shift in Food Consumption patterns: With rising incomes, dietary preference has shifted towards more nutritious and high-value food items away from starchy cereals.
  •  This changing preference has resulted in high levels of inflation in pulses and other protein-rich items in recent years
• Minimum Support Prices: The role of MSPs in guiding food inflation is fairly large as the crops covered under MSP constitute more than a third of all-India food consumption basket. 
  • The MSP as a concept is intended to be a floor for market prices but during years with substantial hikes, it eventually ends up setting market prices directly, which is generally followed by rise in prices of key agricultural crops.
• Climate Impact: 
  • Impact of El Nino: Uncertainty has increased over the outlook for both summer and winter crops as there is a 95% chance that El Nino will prevail from December 2023 to February 2024. 
  • Geographical anomalies: The recent spike in the prices of essential food items, which have doubled in most cases across India, has been attributed to geographical anomalies like heatwave and pestilence.
• Fuel Prices: The price of fuel, another key input in agriculture, has witnessed considerable increase in recent years. 
  • For Example: An increase in fuel inflation by 1% leads to a 0.13% rise in food inflation, and the effect slowly declines through the next 12 months. 
• Economic recovery has pushed up prices: In May 2020, food prices fell to their lowest levels in four years, partly due to the pandemic, as economic activity declined sharply in the wake of lockdowns
  • As global economic growth started to recover—global GDP is estimated to have grown by 5.9% in 2021 after a 3.1% contraction in 2020—commodity prices, including that of food items, started receiving a boost.
• Russia-Ukraine Crisis: The global impact of ongoing conflicts, in Ukraine, has adversely affected, particularly developing countries, with spiraling energy and commodity prices and disruptions in global logistical supply chains.
  • With Ukraine and Russia accounting for up to 30% of the global exports for wheat, food prices, too, have jumped.

What are the government measures to control food inflation?

• Commodities at Subsidized Prices: The government has stepped up sales of subsidized vegetables, particularly onions and tomatoes, through its distribution network, while releasing stocks of wheat and sugar into the market to cool prices.
• Reducing Import Duty: In the case of pulses, the government is encouraging farmers to grow pulses to boost domestic production and has also reduced the import duty on some of the pulses to improve local availability.
• Ban on Exports: The imposition of a wheat export ban in May 2022, a ban on the export of broken rice in September 2022 to ensure an ample domestic rice supply and gradually bring prices down.
• Ban on Stockpiling: The government has also banned traders, millers, wholesalers and retail chains from holding more than 3,000 tonnes of wheat. Smaller retailers and shops cannot stock more than 10 tonnes. 
• Operation Greens:  Operation Greens seeks to stabilize the supply of Tomato, Onion, and Potato (TOP) crops and to ensure the availability of TOP crops throughout the country round the year without price volatility.
• Floor Prices: Recently, the Union government imposed a minimum export price (MEP) of $800 a tonne ( ₹67 a kg) on onion exports between 29 October and 31 December 2023 to ensure domestic availability.
  • The move comes against the backdrop of rising onion prices owing to a delay in the arrival of kharif onions.

Way Forward

• Investments to increase food supply elasticity: Investments and policies to make food supplies more price-sensitive—such as improved rural infrastructure, well-functioning input and output markets, and competitive supply chains—should be pursued to reduce domestic price volatility, and domestic prices should reflect export or import parity prices.
• Facilitating effective risk management tools: More effective risk management tools are needed by farmers, traders, and consumers to cope with extreme weather events, global warming, and market fluctuations.
  • Climate Smart Agriculture (CSA): It is an approach that helps guide actions to transform agri-food systems towards green and climate-resilient practices.
  • Contrary to conventional agricultural development, CSA systematically integrates climate change into the planning and development of sustainable agricultural systems.
• Institutional forecasting mechanism: The Indian government needs to set up a strong institutional forecasting mechanism that could send demand and price signals to the farming community before the sowing season.
  • Giving farmers the scope to scale up  production in accordance with exzpected demand.
• Supply-side reforms: Addressing structural bottlenecks and improving supply-side factors can help alleviate inflationary pressures.

Also Read: India’s Food & Nutrition Security: Time to Adopt a Three-Sided Approach

Conclusion:

Addressing the multifaceted challenges of food inflation in India requires a comprehensive approach, encompassing global market dynamics, climate resilience, effective policy measures, and investments in supply-side reforms to ensure long-term food security and economic stability.