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India’s food inflation problem
In its monetary policy review, the Reserve Bank of India threw a surprise and held interest rates steady. On the backdrop of a sharp rise in inflation, the action was largely unexpected.RBI governor Raghuram Rajan explained that the rise in inflation is mainly because of food inflation. He added that the trend may not continue and inflation may fall. With that in mind, the RBI governor decided to wait for more inflation data to come in before hiking interest rates. As he expected, inflation – measured by the Wholesale Price Index (WPI) – moderated in December to a five-month low of 6.16%. Still, food inflation remains a major concern. In a speech, Deepak Mohanty, Executive Director of the RBI, explained why food inflation is so persistently high in India.
Here are the factors that affect food inflation in India according to him:
India’s main source of food products is domestic agriculture production. Since, other segments have grown faster than agricultural sector, which is also reflected in the fall in its share in overall Gross Domestic Product – the measure of the economy – to 14% from 25% over a decade-and-a-half back. Industries have grown faster than agriculture, predominantly because of higher productivity. This means there is a shorter supply of food and food products now than earlier. Traditional economic theory suggests that a fall in supply during high demand pushes up prices.
Agriculture, and therefore, food production, depends heavily on monsoon – the season of heavy rainfall. As a result, a good monsoon has a direct bearing on inflation. However, historical data suggests that the impact of monsoon has reduced. Since 2008-09, food inflation rose sharply to 10.3%. This was kick-started by the drought in 2009-10. But despite good monsoon in the next few years, food inflation did not fall.
Global food prices:
While India mainly depends on domestic produce, some food articles are imported like sugar, coffee, dried vegetables, and some dairy products. As a result, global food prices too have an effect on India’s food inflation. In the last few years, global food prices rose, while the rupee depreciated. This also fuelled domestic food inflation.
As income levels rise, household expenditure increases. This means demand is on the rise for food products, as Indian households spend more on protein and vegetables today than earlier, according to expenditure surveys by the National Sample Survey Office. Annual average real expenditure – which measures consumption after taking into account inflation – turned positive in the second half of the 2000s, and increased during 2010-12. At a time when supply is lower, a high demand can drive inflation higher.
Agriculture production is more costly today than earlier due to a rise in the cost of fuel, fertilisers as well as labour. “Even after accounting for inflation, real wage increase has been significantly positive. Non-agricultural wages too have shown similar increases in rural areas,” Deepak Mohanty said in his speech. This increase is often passed onto the consumers by way of price hikes.
When we say inflation is at 7%, it does not mean prices of all kinds of food items are up 7% from the previous year. Different goods and services witness varied levels of price hikes. Each of these goods have a different weightage in headline inflation. Primary articles like food articles, cooking oil, jute, cotton and minerals stand for 20.12% of the total basket of goods, while fuel and power accounts for 14.91%.