Food Inflation: How Prepared Are We to Deal With a Hot March Again in 2023?

The inflation data for August has shown that inflation is still adamant. Food inflation continues to be a major cause of concern as it affects the poorer sections of society.

Listen to this article:

After three successive months of consumer price index (CPI)-based annual inflation rates being above 7%, the inflation print of July, released in August, showed a mild moderation (6.71%). This led many, including the Reserve Bank of India (RBI) and its governor, to point out that India’s retail prices had “anchored” and the retail inflation was on its way down.

However, the inflation data for the month of August, released in September, has again shown that inflation is still adamant. Food inflation continues to be a major cause of concern as it affects the poorer sections of society (see figure 1).

Figure 1. Annual inflation rates: Overall WPI and CPI (left-hand side) and CFPI and WPI-food (right-hand side). Source: Office of Economic Adviser and MOSPI

The annual WPI and CPI inflation rates in August were 12.4% (down from 13.9% in July) and 7% (up from 6.7% in July), respectively. In terms of food, the wholesale inflation rate was 9.93% (up from 9.4% in July) and at the retail level (consumer food price index), the inflation rate was 7.6% (up from 6.7% in July).

Among other things, two interesting points emerge: First, retail-level inflation rates have trailed inflation at the wholesale level. In case of both overall and food indices, this trend started around February 2021. Second, inflation is accumulating. This is particularly stark in overall inflation rates (left-hand side in figure 1) where the country is facing double-digit inflation at the wholesale levels since April 2021. The double-digit inflation in 2022 is building up on the double-digit rates of the previous year.

In this article, we analyse key aspects of these inflation numbers.

India’s inflation vis-à-vis other countries

Using retail price inflation data from the International Monetary Fund (IMF) (see figures 2 and 3), we find that Indian food inflation is much lower than many neighbouring countries like Pakistan, Sri Lanka and to some extent, Bangladesh.

Figure 2: Retail Inflation in India and Globally. Source: IMF

Figure 3: Annual Retail Inflation Rates for July 2022. Source: IMF

In July – the latest month for which data is available for most major countries – we find that retail prices compared to July 2021 have risen steeply in Turkey and Sri Lanka. However, China and several Southeast Asian countries like Indonesia and Vietnam have contained inflation at much lower levels than India. China’s retail inflation in July was only 2.7% while India’s was 6.7%. The Chinese government carries a much larger stock of food, including food grains, soybean, beef, pork, poultry, milk powder, etc.

Another question in this context is, how better has India’s inflation performed as compared to the US?

Even though in terms of inflation rates, it appears that India has performed better than the US (see figure 3), in terms of food security, this may not be the case.

An average American household spends about 7.1% of its household income on food. However, an average Indian family spends about 45.5% of its household income on buying food according to NSSO 2012. A 10% increase in food prices will affect the households in the two countries differently. With dearer food, an average Indian family will be hardly left with sufficient money to meet other important needs like education and health.

In a previous article, we estimated how the rising cost of food in India is impacting a common Indian family. Some households are now likely to be spending more than 66% of their income to afford two meals every day, leaving less than 34% of income for meeting other expenditures.

Also read: India’s Food Inflation Is Eating the Monthly Budgets of a Million Poor Households

Have the drivers of Indian retail food inflation changed over the last year?

In August, the CPI food inflation rate was about 7.6%. About 60% of this was due to a steep rise in inflation in cereals, vegetables and milk and milk products (see figure 4).

Figure 4: Contribution of components within CPI Food and Beverage (%). Source: MOSPI

Compared to this, in August 2021, major drivers of food inflation were edible oils (whose annual inflation rates averaged about 33%), meat (average inflation rate of 18%) and fish, milk and pulses (average inflation rate of 8-9%).

Milk and milk products continue to contribute substantially to food inflation since last year. High input costs, and high costs of logistics, have pushed Amul, Mother Dairy and similar dairies to steadily increase their retail price of milk. Prices of milk were last hiked in August 2022. Its impact is visible in the inflation numbers.

To moderate these pressures, the Government of India has been undertaking aggressive steps since last year, more in the case of edible oils and pulses. Among other things, it reduced import duty on edible oils like soybean, palm, sunflower, etc. The government also took multi-pronged actions on pulses. This included the use of the Essential Commodities Act (ECA), reducing import duties, and signing agreements with Mozambique, Myanmar and Malawi for the import of pulses.

The government even suspended future trading in most agricultural commodities, including chana and moong (tur and urad futures had long before been suspended) in December 2021. This step ensured prices of most pulses stayed low – lower than even the minimum support price in the case of chana.

Meanwhile, cereals emerged as the most charged category within food in the August inflation data. This was mainly driven by rice and wheat (see table 1). Indian exporters of wheat had sensed a big opportunity in the global markets due to the Russian invasion of Ukraine. Blockage of ports on the Black Sea had brought a complete halt to the export of Ukrainian wheat. A lower wheat crop and a large commitment of food grains under the Pradhan Mantri Garib Kalyan Anna Yojana have also contributed to the sentiment of shortage of wheat supplies in the domestic market.

The paddy crop in Uttar Pradesh, Bihar and Jharkhand have also been adversely impacted by the deficient monsoon rains in July and August. The distribution of rainfall has also been erratic. Some regions of Maharashtra and Karnataka have received excessive rainfall in August and September which may have caused some damage to rain-fed crops like jowar, bajra, tur and groundnut. Maize is a curious case as its inflation has continued to be high in the past two years.

Table 1: Annual Inflation Rates in August 2022 (over August 2021) (figures in %)

Rice-others 6.9% 4.3%
Wheat-others 15.7% 17.3%
Maize 16.1% 25.3%
Gram-whole 1.3% -1.0%
Tur 2.9% 6.8%
Mung -0.9% 2.9%
Tomato 16.4% 6.0%
Onion -18.5% -24.8%
Potato 40.3% 49.3%
Milk 6.4% 4.9%
Eggs -4.6% 0.2%
Chicken meat -4.2% 1.1%
Banana 17.8% 39.1%

Source: Office of Economic Adviser and MOSPI

It is rather surprising that eggs and meat are not showing high inflation despite higher prices of maize, which is the major ingredient of poultry feed. It is possible that cattle feed manufacturers have shifted to broken rice, bajra and damaged wheat, in place of maize.

Within vegetables, potatoes and tomatoes are driving up inflation. The inflation in potatoes is partly due to the base effect since potatoes were selling exceptionally cheap last year in August. In the case of tomatoes, the excessive rains in some key tomato-growing areas have caused damage to the tomato crop, pushing up its prices. However, by December, we should see some moderation in its prices since new tomato crop arrivals would start from various parts of India.

Also read: Is Food Inflation in India Driven by Demand or Supply?

Price pressures

Summers and monsoons explain much of the food inflation in the country. Anecdotally, anyone tracking Indian food prices knows that prices tend to be high in summer and monsoon months and they moderate in winter. We are hopeful some respite from the usual seasonality pattern of food prices will play out in the coming months, easing price pressures.

However, there are some major crops where the pressures are building up. Let us look at the recently released Kharif production data by the government (see table 2).

Table 2: Production of key Kharif crops (first advance estimate)

2020-21 2021-22 2022-23 Change in 22/23 over 21/22 (MMTs) % change in 22/23 over 21/22
Rice-kharif 105.21 111.76 104.99 -6.8 -6.1%
Maize-kharif 21.56 22.63 23.1 0.5 2.1%
Tur 4.32 4.34 3.89 -0.5 -10.4%
Urad-kharif 1.51 1.94 1.84 -0.1 -5.2%
Mung-kharif 2 1.48 1.75 0.3 18.2%
Groundnut -kharif 8.528 8.375 8.369 0.0 -0.1%
Soybean 12.61 12.995 12.892 -0.1 -0.8%
Sugarcane 405.4 431.8 465.05 33.3 7.7%
Cotton (lakh bales) 352.48 312 341.9 29.9 9.6%

Source: Directorate Of Economics and Statistics, Government of India

Rice, tur and urad are clearly smaller crops this year. In fact, Kharif rice and tur production this year is predicted to be lower than in the last two years.

While a lower production of the rice crop this year may be attributed to the weather and rainfall extremities, the lower production of the tur and urad crops is largely due to government policies. In their effort to douse any price pressure in pulses, the government adopted multiple instruments, one of them being “duty-free” import of tur and urad till March 2023. This has made sister crops like soybean and cotton relatively more lucrative for pulses farmers.

With the suspension of commodity futures of pulses, farmers do not have access to any credible prediction of prices in the coming months. Overall, it appears that India’s pulses’ momentum may be losing steam and the government has to wake up before it is too late. If the status quo remains, the chana crop in the upcoming rabi season may also suffer the impact of cheaper and continuing imports and sales of chana by Nafed at lower-than-MSP prices.

Another palpable threat to food inflation is the climate. After the country suffered a lower wheat crop production, due to heat waves ruining yields closer to the harvest time, and now a lower rice crop production, due to the volatile pattern and distribution of monsoon rains, how ready are we to face say a hot March again in 2023?

This threat is more real and close than we can fathom. We have to get ready to face this challenge head-on, or else the threat to our food security may just turn real.

Shweta Saini is an economist. Siraj Hussain was secretary of agriculture to the Government of India. They are the promoters of Arcus Policy Research.