FOOD INFLATION OUTLOOK

Syllabus:

GS 2:

  • Issues relating to Poverty and Hunger.

GS 3:

  • Indian Economy and issues relating to Inflation.

Why in the News?

The recent decline in food inflation, driven by favourable monsoon conditions and low global food prices, has sparked cautious optimism in India’s economic outlook. Despite this, food inflation remains a significant concern, affecting household incomes and hindering economic policy flexibility, making it a critical issue for policymakers.

FOOD INFLATION OUTLOOK - UPSCSource: IE

Food Inflation overview :

  • Decline in Food Inflation: After eight months of high food inflation, retail food inflation dropped from 9.4% in June to 5.4% in July, aided by a favourable base effect from the previous year.
  • Persistent Concerns: Despite the recent decline, food inflation remains a significant challenge, impacting household incomes and curbing consumer spending, while also hindering the Reserve Bank of India from lowering interest rates.
  • High Impact: With food making up a large portion of the average Indian’s consumption, inflation in this sector has a direct impact on household expectations and the overall economy.
  • Reasons for Optimism: Two key factors—improved monsoon conditions and low international food prices—offer hope for easing inflationary pressures in the coming months.
  • Public Perception: RBI Governor Shaktikanta Das highlighted how the public largely perceives inflation through the lens of food inflation, which shapes household expectations.
About FAO Food Price Index (FFPI):

  • Purpose: The FFPI tracks the
  • monthly changes in global prices of a selected basket of food commodities.
  • Composition: It is calculated by averaging five commodity group price indices, with each group’s weight based on their average export shares during the 2014-2016 base period.
  • Base Year: The index uses 2014-2016 as the reference period for calculating the average export shares.
  • Introduction: The FFPI was introduced in 1996 as a public resource aimed at monitoring trends and developments in international agricultural commodity markets.
  • Global Relevance: It serves as an essential tool for understanding and analyzing fluctuations in global food prices and their impact on economies and food security.

Hope from Monsoon

  • Monsoon Performance: The southwest monsoon arrived slightly ahead of schedule, with cumulative rainfall improving from a 10.9% deficit in June to a 4.8% surplus by mid-August, boosting kharif crop prospects.
  • Regional Variations: While June saw below-normal rainfall in most regions, July recorded a 9% surplus, with rainfall in August further improving the cumulative seasonal surplus.
  • Higher Crop Acreage: The favourable monsoon has led to increased sowing of key kharif crops like rice, pulses, maize, oilseeds, and sugarcane, which should help mitigate future inflation in these commodities.
  • Farmer Decisions: Farmers are more likely to plant crops with assured prices and adequate water supply, leading to aggressive sowing of crops like arhar and maize, which are currently trading well above their minimum support prices.
  • Shifts in Crop Choices: Due to flat cotton prices and high pest risks, farmers have reduced cotton acreage in favour of shorter-duration crops like groundnut, soybean, and paddy.

Low Global Food Prices

  • Global Trends: Since December 2022, global food inflation has been negative, with the FAO’s food price index falling by 3.1% year-on-year in July 2024, and cereal prices dropping significantly from their 2022 peaks.
  • Impact on Imports: Lower international prices, particularly for commodities like wheat, make imports more feasible, potentially reducing domestic inflationary pressures if import duties are adjusted.
  • Comparison with Domestic Prices: Russian wheat, for example, is currently being exported at significantly lower prices compared to last year, offering a potential buffer against domestic price spikes.
  • Imported Inflation Risks: Unlike the period following the Russia-Ukraine conflict, current global price trends reduce the risk of imported inflation, particularly in key commodities like vegetable oils and wheat.
  • Policy Implications: The government may consider lowering import duties to take advantage of lower global prices, thereby stabilizing domestic markets and easing inflationary pressures.

Cautious Optimism

  • Government Stocks: Wheat stocks in government warehouses are at their third-lowest level for August, while rice stocks are at a record high, suggesting a mixed outlook for food security.
  • Reservoir Levels: Above-average monsoon rains have filled major reservoirs to nearly 65% of capacity, which is higher than both last year’s levels and the 10-year average, supporting future crop irrigation needs.
  • La Niña Prospects: The potential emergence of La Niña later this year, known for bringing robust rainfall to India, bodes well for the upcoming rabi cropping season.
  • Export and Stock Limits: A strong kharif crop could lead to the relaxation of export restrictions on non-basmati rice and sugar, and the lifting of stockholding limits on pulses, which would further ease inflationary pressures.
  • Uncertainty Ahead: Despite positive signs, the full impact on food inflation will only be clear after the kharif harvest in a month and the rabi harvest next spring, leaving some uncertainty in the inflation outlook.

Effects of Food Inflation:

  • Reduced Purchasing Power: Food inflation erodes household incomes, reducing the ability of families to spend on other essential goods and services.
  • Increased Poverty: High food prices disproportionately affect low-income households, potentially pushing more people into poverty.
  • Widening Inequality: As food inflation hits the poor hardest, it can exacerbate income inequality within society.
  • Consumer Behaviour: Rising food prices can shift consumer spending patterns, leading to reduced consumption of nutritious foods and increased reliance on cheaper, less healthy options.
  • Economic Slowdown: Persistent food inflation can dampen overall economic growth by limiting consumer spending and reducing demand for non-food products.
  • Policy Challenges: High food inflation complicates monetary policy, making it difficult for central banks to balance growth and inflation control.

The Path Forward

  • Balancing Growth: Achieving a balance between addressing food inflation and supporting economic growth is crucial for sustaining India’s development trajectory.
  • Policy Adjustments: Continued focus on agricultural productivity, import policies, and inflation management will be necessary to navigate the challenges ahead.
  • Monitoring Trends: Ongoing assessment of monsoon performance, global price trends, and domestic crop yields will be key to maintaining food security and controlling inflation.
  • Private Sector Role: Encouraging private sector participation in agriculture and food processing can help enhance efficiency and stabilize prices.
  • Global Competitiveness: Strengthening global competitiveness in agriculture through innovation and better resource management will support long-term economic stability.

Conclusion

While the current trends in food inflation offer some relief, the situation remains precarious. Effective policy measures, including managing crop yields, import strategies, and inflation control, will be crucial in sustaining this positive momentum and ensuring long-term food security and economic stability in India.

Source:India Express

Mains Practice Question

Discuss the impact of recent food inflation trends on India’s economic stability. How can policy measures address these challenges while ensuring food security and supporting economic growth?”

Associated:

https://universalinstitutions.com/rbi-likely-to-maintain-repo-rate-amid-persistent-food-inflation/