Understanding India’s food inflation: Factors behind the price surge

Food inflation in India has remained at 8% year-on-year since November 2023. A severe heatwave has further reduced the supplies of pulses, vegetables, and cereals, rendering export curbs and import tariff reductions minimally effective.

RBI experts indicate that a robust monsoon by early July could ease concerns over the delayed cultivation of kharif crops. Government interventions, such as restricting exports and easing imports, could help reduce the prices of some food commodities.

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The Reserve Bank of India (RBI) held the Monetary Policy Committee (MPC) meeting on June 7 that reviewed the surveys conducted by the RBI to gauge consumer confidence, households’ inflation expectations etc. Based on the assessment, the MPC decided to keep the policy repo rate under the Liquidity Adjustment Facility (LAF) unchanged at 6.50%. The decision is taken with an objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.

The majority of RBI’s monetary policy committee members expressed caution on food inflation in India which is slowing the pace of disinflation. Food inflation in India has been around 8% YoY since November 2023 with no signs of easing despite early arrival of monsoon rains and forecasts above-normal rainfall. This constant inflation has kept the headline inflation above the central bank’s target of 4%.

In May, India’s headline retail inflation eased to the lowest in a year at 4.75% from 4.83% in April. However, the Consumer Price Food Index or CPFI remained almost flat at 8.69% versus 8.7% a month ago.

Key factors driving India’s food inflation

During the bi-monthly monetary policy presentation, RBI Governor Shaktikanta Das warned that the exceptionally hot summer and low reservoir levels could further impact the summer harvest of vegetables and fruits. He stressed the need to closely monitor the rabi arrivals of pulses and vegetables.

Since 2023, food inflation has significantly impacted the Indian economy, with several categories experiencing notable price increases. Government data reveals year-on-year inflation rates as follows: vegetables at 28%, pulses at 17%, cereals at 8.6%, meat and fish at 8.2%, spices at 7.8%, and eggs at 7.1%.

The annual monsoon, on which India’s agricultural output is dependent arrived early in the southern tip of the country and advanced swiftly to cover the western state of Maharashtra ahead of schedule. This initial momentum soon waned, resulting in 18% rainfall deficit so far this season.

Here are a few other factors that are affecting the food inflation:

• An ongoing heat wave and a drought last year has significantly reduced the supply of foods like pulses, vegetables and cereals.
• Temperature being recorded 4-9 degrees Celsius above normal has spoiled harvested and stored vegetables and hindering the planting of crops like onion, tomatoes, eggplant and spinach.
• Water scarcity has disrupted both seedling planting and replanting further aggravating the shortage of vegetables.

When will the prices stabilize?

The RBI expects a normal monsoon in the south-west region which could lead to softening of food inflation pressures over the course of the year.

Commodity wise, Sugar prices are expected to remain high as the next season’s production is anticipated to drop. Potatoes, a common vegetable in Indian households, have become costlier by 15% over last month despite good production. Similarly, onion prices are also expected to shoot up due to Rabi production shortfall due to exceptionally warm summer months. Tomato prices too have skyrocketed. Prices of a kilogram of tomato, which were Rs 50-60 last month, have touched Rs 100, forcing consumers to reduce their consumption of tomatoes. Last year’s drought has affected supplies of pulses like pigeon peas, black matpe and chickpeas which will not improve until the new season crops are harvested.

On the other hand, Wheat is expected to witness rise in prices as the government has announced no plans to import grain. Similarly, Rice prices may also increase as the government raised the minimum support price of paddy rice by 5.4%.

As of vegetables, the production in most parts of the country has been affected due to severe heat waves, increasing the prices of common summer vegetables like ridge gourd, okra and leafy vegetables by 20-25% on a yearly basis and 10-15% on a monthly basis. Although the prices are expected to fall from August onwards if the monsoon revives as per usual schedule and is not disrupted by floods or prolonged dry spell.

Dr. Debesh Roy, Chairman of the Institute for Pioneering Insightful Research Private Limited (InsPIRE), commented on the current state of food inflation: “Although CPI inflation is steadily decreasing, it remains above the RBI’s target of 4%. However, it has stayed below the RBI’s upper tolerance limit of 6% for nine consecutive months. Core inflation has reached an all-time low of 3%.

The above-normal temperatures in nearly half the country have damaged harvested and stored vegetables, driving up their prices. These prices are expected to normalize by August if the monsoon revives and covers the entire country.”

Although the food inflation solely depends on production, distribution and climate factors, the government interventions such as restricting exports and easing imports can help bring down the prices of some food commodities.

In a recent effort to combat food inflation, the government has decided to permit limited imports of corn, crude sunflower oil, refined rapeseed oil, and milk powder under the tariff-rate quota (TRQ) system. This initiative allows importers to pay reduced or zero duties as part of the government’s strategy to control rising food prices. However, the government cannot do much when it comes to prices of vegetables which are highly perishable and difficult to import.