Explained: Will food become costlier?

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 

1. Global prices of major agricultural commodities, have increased compared to their levels a year ago.  
2. 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. 
3. Whereas in India the increase in global food prices is not getting reflected in what consumers in India are paying. For instance, 
4. 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. 
5. 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 

1. 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. 
2. 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. 
3. 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. 

1. The first one is international prices, that matters for edible oil and pulses as discussed above. 
2. 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. 
3. 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. 
4. 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