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Relevance: Global prices of major agricultural commodities in India and the reason behind divergence in prices, way forward
Synopsis: Factors affecting Food inflation in India.
Background
- Brent Crude prices ($76.18) had reached the highest since October 2018.
- Since the increase in international oil prices is being fully passed on to Indian consumers, there is a concern that prices of Food will also increase.
India’s Scenario is different from Global Scenario
- Global prices of major agricultural commodities, have increased compared to their levels a year ago.
- Similarly, The UN Food and Agriculture Organization’s (FAO) world food price index (FPI) touched 127.1 points, that is the highest value since September 2011.
- Whereas in India the increase in global food prices is not getting reflected in what consumers in India are paying. For instance,
- Annual consumer food price index (CFPI) inflation in India, at 5% in May, is way lower than the 39.7% year-on-year rise in the FAO-FPI for the same month.
- Interestingly, Global food inflation crashed after March 2020 after the impact of the Pandemic. Whereas in India, Retail food inflation was around double-digits till November.
Reasons for the divergence
Understanding the drivers of both global and domestic inflation will help us understand the reason for divergence
- The drivers of Global food inflation are mainly due to,
- Increase in demand due to unlocking of economies.
- Chinese stockpiling for building strategic reserves, as well as in anticipation of fresh corona outbreaks.
- Production shortfalls in Brazil, Argentina, Ukraine, Thailand and even the US.
- In India, by contrast the reduction in food inflation is mainly due to two reasons.
- One, good monsoons in 2019 and 2020 that led to bumper kharif crop harvest.
- Two, the collapse of demand from successive Covid-triggered lockdowns.
- India’s food index has seen rise in edible oils and pulses mainly. These are the Agri-commodities that India significantly imports.
- Edible oil import: India imports 13-15 million tonnes every year and produces just 7.5-8.5 mt.
- Pulses Import: India produces 22-23 Mt and imports h 2.5-3 Mt.
In the future, what are the possible factors that can impact Food Inflation in India?
Food inflation in India in the coming months is likely to be influenced by four determinants.
- The first one is international prices, that matters for edible oil and pulses as discussed above.
- The second, determinant is the monsoon’s progress. With 18% above-average precipitation during the southwest monsoon the Production is set to increase. This will help in controlling Food inflation at permitted levels.
- The third determinant is the extent of fuel cost increases being pass-through to consumers. In the event of increase in fuel prices, there is likelihood that processors, transporters and even farmers may pass the increase in fuel costs to consumers.
- The final determinant is political. Governments decision on minimum support policy, procurement of buffer stocks of wheat and paddy, regulation of Sugar price will all impact Food inflation.
Source: Indian Express
