How food inflation in India has been de-globalised, what factors can drive prices now

GS Paper III

News Excerpt:

Globally, food inflation based on the FAO index has been negative (minus 10.1%) since November 2022. It’s been the opposite in India, with the consumer food price index inflation remaining elevated at 9.5% in December 2023.

Status of Global Food Prices:

  • The UN Food and Agriculture Organization’s (FAO) food price index (a trade-weighted average of world prices of a basket of food commodities over a base period value, taken at 100 for 2014-16) averaged 143.7 points in 2022 and 125.7 points in 2021. It fell 13.7% to 124 points in 2023.

Global Inflation vis-a-vis Domestic Inflation:

  • It can be seen that international food price increases have exhibited far more volatility relative to domestic inflation.
  • During the last three years alone, global food inflation has oscillated from a high of 40.6% to a low of minus 21.5%.
    • Domestic food inflation, in contrast, has been somewhat range-bound between 0.7% and 11.5%.

Transmission of global prices to India:

  • The usual route by which transmission of prices takes place is imports and exports.
    • For instance India imports vegetable oils over 60% of its annual consumption requirement.
      • Due to Covid and then the Russia-Ukraine conflict, the global supply disruptions resulted in domestic retail edible oil inflation soaring to double digits.
    • High global prices, likewise, caused runaway inflation in cereals, particularly wheat, from the middle of 2022 – in this case, by making exports attractive and exacerbating  domestic shortages.
  • The scope for such transmission of global inflation to domestic prices in India is largely limited to the two agri-commodities where the country is significantly import-dependent:
    • Edible oils and Pulses.
    • While India is self-sufficient and also an exporter in cereals, sugar, dairy, poultry, fruits and vegetables.
  • At present, the government has banned shipments of wheat, non-basmati white rice, sugar and onion.
    • Hence the potential for even the second route of export-led inflation is effectively shut.

De-globalisation of food inflation:

  • Food inflation in India is today de-globalised.
  • Government action: The government has ensured it through curbs on exports or allowing imports of major pulses and crude edible oils at 0-5.5% duty till March 31, 2025.
  • Low global prices: Russian wheat is currently being exported at $240-245 per tonne (as against $430 in June 2022), while Indonesian crude palm oil is coming in India at $940 per tonne (from an average of $1,828 in March 2022) – means that the threat of imported inflation is practically ruled out.

Global scenario and Impact on imports:

  • The ongoing Houthi militant attacks in the Red Sea disrupt vessel movements from the Mediterranean through the Suez Canal, causing concern for big-ticket food item imports into India.
  • Imports not affected:
    • Pulses like arhar and urad are mainly from Mozambique, Tanzania, Malawi, and Myanmar, not via the Suez waterway-Red Sea route.
    • Red lentils are from Australia and Canada, taking the North Pacific-Indian Ocean route.
    • Palm oil from Indonesia and Malaysia or Soybean from Argentina and Brazil, routed through the South Atlantic and Indian Ocean.
  • Imports affected:
    • Yellow/white peas are marginally affected, but only from Russia and some European countries, not from the biggest supplier (Canada).
    • Sunflower oil from Russia and Ukraine is facing problems due to not going by the normal shipping lane linking Europe and Asia.
      • Sunflower's share in India's total edible oil imports is only 3 mt, way behind palm oil (9.8 mt) and soybean (3.7 mt).

Domestic factors influencing food inflation:

  • In the coming months, the course of food inflation is likely to be determined more by domestic production.
  • The crops of concern are primarily cereals, pulses and sugar.
    • Retail Cereal and Pulses inflation, at 9.9% and 20.7% is higher than the overall 9.5% food inflation.
    • Pulses inflation has been in double digits since June 2023, while cereals recorded the same for 15 consecutive months from September 2022 to November 2023.
  • Cereals:
    • The wheat is highly sensitive to heat stress, especially during March at the time of grain formation and filling.
    • Any sudden temperature spikes when the kernels are accumulating starch and protein can translate into yield loss through premature ripening, as it happened to the 2021-22 crop.
    • Last year’s unseasonal heavy rain in March leading to the lodging (bending) of the standing crop in many places, can put further pressure on cereal stocks with the government. These are already at a seven-year-low for wheat.
  • Sugar:
    • Sugar mills started the new season from October 2023 with six-year-low stocks and no clarity on actual production when they stop crushing by April-May.
  • Pulses:
    • Arhar and Chana or chickpea are trading at Rs 9,000-9,200 and Rs 5,300-5,400 per quintal, as against Rs 7,000-7,200 and Rs 4,500-4,600 respectively a year ago.
    • Farmers have planted less area i.e. 15.5 mh in pulses, this rabi season as against 16.3 mh in 2022-23.

Conclusion:

The food inflation trend in India is projected to be primarily influenced by local production factors, particularly for cereals, pulses, and sugar. There are various challenges that can potentially worsen the food inflation in India, such as heat stress affecting wheat crops, low stocks at sugar mills, and reduced planting area for pulses during the current rabi season. However, weather and crop conditions so far appear conducive to a bumper harvest. Overall, currently, the causes of food inflation in India are perceived to be more "domestic" than "global".

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