Ashraf Engineer
December 21, 2024
EPISODE TRANSCRIPT
Hello and welcome to All Indians Matter. I am Ashraf Engineer.
The food inflation numbers released a few days ago should give us pause. Food inflation makes up just under half of the overall Consumer Price Index basket, and it eased to 9.04% in November from 10.87% in October. While the number has fallen, it remains too high for comfort and is way over the 4% tolerance limit set by the Reserve Bank of India, or RBI. This is why the RBI did not lower interest rates despite pressure from the government.
Food prices moderated on the back of a bumper summer harvest, helped by a decent monsoon. Reservoir levels were encouraging and minimum support prices – the rate at which farm produce is procured by the government – were higher.
Despite the November nudge downwards, food inflation was responsible for 72% of the year-on-year rise in headline inflation. Average food inflation this fiscal has risen to 8.4% vs 7.5% in the last fiscal.
Why are food prices so high and what can be done about it?
SIGNATURE TUNE
Before we analyse why food prices are high, let’s understand that the effect of food inflation varies from income group to income group. This is because the share of spend on food differs in each group. The poor have less money and so a larger proportion of their earnings are spent on basics like food and fuel. The middle and high-income brackets have more in their pockets and therefore their discretionary spends are greater than that of the poor, which means the proportion of total spend on food reduces. High food inflation, therefore, hurts the poorer population the most.
To give some perspective, in this fiscal, the gap between headline inflation for the rural poor and urban rich has doubled compared to the last fiscal to 1.2%.
Vegetables, of course, are responsible for much of the food inflation but even edible oils are leaving a mark. They recorded a 30-month high inflation rate of 13.3% because of global supply disruptions and a rise in import duties. Since October, this category has seen the fastest rise.
Among vegetables, prices of tomatoes, onions and potatoes have been a major worry.
Several factors contribute to the rise. For one, the short seasonal cycles of these crops and their perishable nature create storage challenges. Often, production is regionally concentrated, which makes supply chains vulnerable to disruptions caused by weather events such as heatwaves or floods. Growing demand further strains supply and sparks price volatility.
During the lean seasons, supply shortages lead to high prices. On the other hand, when there is a bumper harvest, farmers are forced to sell their produce at distress prices – sometimes below the cost of production. This is common in economies that have poor supply chain infrastructure or inefficient distribution networks.
It is supply-side factors like erratic weather that has kept food inflation at around 8% year-on-year since November 2023. Last year, a drought and heatwave significantly impacted supplies of pulses, vegetables and cereals. The government responded with curbs on food exports and lowering import tariffs but that barely helped.
With temperatures in many parts of the country rising 4 to 9 degrees Celsius above normal this year, large volumes of stored vegetables spoiled and the planting of crops such as onions, tomatoes, brinjal and spinach was affected.
But the monsoon was normal, so why did that not help?
The monsoon arrived early at India’s southern tip and advanced swiftly to cover Maharashtra ahead of schedule. However, the momentum waned and overall there was an 18% rainfall deficit in the early stages and this delayed the planting of summer crops.
Governments have generally responded to such situations by restricting exports and easing imports to bring down food prices. However, they can do little when it comes to the prices of vegetables, which are perishable and difficult to import.
So, the government has sought to balance that by restricting exports of sugar, rice, onions and wheat in the past. For example, after a ban on wheat exports in May 2022, India announced an abrupt stop to non-basmati white rice exports. Later, it imposed a duty of 40% on onions to discourage exports and improve domestic supplies.
However, such measures tend to be unpopular with farmers because it constricts their income and that can have an impact on electoral results.
There are other measures that have been discussed.
For example, improving the functioning of Agricultural Produce Market Committees, or APMCs, which oversee state-run mandis and regulate the marketing of produce.
Aggressively developing cold storage infrastructure would prevent losses due to rotting or delays in transport. By investing in processing facilities, India could increase crop productivity to stabilise supply and further reduce wastage.
These are just some of the measures that could lower supply disruptions and stabilise prices.
Let’s remember also that India’s food price problem could rapidly become the world’s problem.
Over the years, India has become the world’s largest exporter of rice, holding a 40% market share, and the second largest exporter of sugar and onions.
If India bans exports of these commodities, it would lead to prices rising across the world due to lower supplies. The impact of this, especially on the global poor, would be significant. Rice is a staple and accounts for much of the calories consumed by millions across Asia and Africa.
Forty-two countries in Asia and Sub-Saharan Africa get 50% of their rice imports from India, rising to 80% in some countries. An export ban on rice in India would mean that this share cannot be substituted with imports from other exporters such as Vietnam, Thailand or Pakistan.
There are other economic implications for poor countries. Elevated prices would mean high food import bills, which would be paid for by precious foreign exchange. This would worsen their balance of payment problems and contribute further to inflation.
Incidentally, export restrictions could also amplify boom-and-bust price cycles in India. For instance, high inflation in pulses in 2015-16 led India to significantly increase imports, but then a normal monsoon and stronger domestic production led to a supply glut and prices crashed into deflationary territory in 2017-18.
So, India has a serious food inflation problem, never mind the fact that it has eased slightly. As I said at the start, it’s still way too high. All of us are feeling it, especially the poor, and India is tightening its belt. Naturally, this has implications for the wider economy because it restricts consumption overall and reins in economic growth. India can’t afford that and nor can it afford vast swathes of its population struggling to put a basic meal on the table.
Thank you all for listening. Please visit allindiansmatter.in for more columns and audio podcasts. You can follow me on Twitter at @AshrafEngineer and @AllIndiansCount. Search for the All Indians Matter page on Facebook. On Instagram, the handle is @AllIndiansMatter. Email me at editor@allindiansmatter.in. Catch you again soon.
