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THE PRICEY PLATE: THE ECONOMICS BEHIND FOOD INFLATION

Edited By: Gokul Sundararaghavan


India’s food prices cooking up a storm: from astronomic tomato prices to fortune-telling food futures



ABSTRACT

Food inflation remains a critical concern impacting economies worldwide, with its effects keenly felt in countries like India, where a significant portion of the population depends on agriculture and food constitutes a substantial part of household budgets. This article delves into the complex web of factors driving food inflation in India, shedding light on key elements that contribute to the fluctuating prices and discussing the repercussions for consumers, policymakers, and the overall economy. The article advocates for holistic and forward-looking approaches to address food inflation, calling for coordinated efforts at national and international levels to ensure stable and predictable policy outcomes.

INTRODUCTION

Inflation is a critical economic indicator that affects the overall purchasing power of consumers and impacts various sectors of an economy. Among the various types of inflation, food inflation holds particular significance for India as a substantial portion of the population depends on agriculture, and food expenses constitute a substantial portion of household budgets. Food Inflation is a measure of the monthly change in international or national prices of a basket of food commodities. It consists of the average of five commodity group price indices weighted by the average export shares of each of the groups over 2014-2016 (Base Year).

WHAT THE NUMBERS SAY

The country’s CPI inflation rose to a three-month high of 4.81% in June 2023, from 4.25% in May this year. Similarly, the Food inflation stood at 7.03% in June 2023 compared to 6.31% in May 2023 and 5.09% during the corresponding month of the previous year. Cereal & products inflation was high at 12.71%, contributing 22.8% to CPI inflation. Pulses & products inflation was at 10.53%. Milk and milk products recorded an inflation of 8.56%. Out of the 299 commodities in the CPI basket, liquid milk had the highest individual item contribution of 11%. The prices of most extensively used vegetables like tomatoes have spiked to all-time highs all over the country. Home chefs and small eateries are serving their tomato-less delicacies as the prices touch Rs 259 per kilogram.

According to researchers, while tomato prices may come down in August-September, onion prices are likely to rise. It is interesting to note that on paper, tomato prices have shown deflation when compared to June 2022. Making predictions and speculations based on such trends and data might give an incorrect picture of the situation. Without trustworthy indices and huge fluctuations in prices, the data is discomforting for the RBI as well as the government since policies largely depend on such statistics. Major criteria like production, demand, supply, stock, and pricing influence not only the market prices of food items but also the respective government policies, subsidies, and schemes.

PRODUCTION AND DEMAND

Geographic and climatic factors heavily influence food production and prices. With heavy rains and flood-like situations across the country, the sowing of Kharif crops is being delayed. Similarly, the negative effects of El Nino don’t paint a very promising picture for the coming cropping cycle. Such environment-based factors increase crop unpredictability which in turn lead to fluctuating prices. Genetically modified seeds and crop diversification have led to systemic changes in cropping patterns. Moreover, there is a regional demand imbalance because of climate change. The overuse of fertilizers, commercial cropping practices, and the rise of “organic” food products have exacerbated the situation. Due to globalization and cuisine influx, food habits have drastically changed leading to a surge in imports of not only staple crops but also exotic food items and their variations.

SUPPLY AND STOCK

As the Ukraine-Russia war continues, Indian imports of edible oil, wheat, cereals, fruits and nuts have suffered severe blows. The sanctions on Russia, territorial occupation of Ukraine, the attacks on Black sea ports protected under the Ukraine Grain Deal and other instances of geopolitical instability have contributed to a global food shortage. Second world countries, with maximum demand and population, don't have a say in price negotiations, which gives free reign to the suppliers to determine the prices. Besides, heatwaves in Europe and their effect on local production have also influenced India’s food import and export policies. India imposed a ban on wheat and rice exports in 2022, and in June 2023, it further tightened the grip on the market by imposing stocking limits on traders and processors.

PRICING

On the other hand, increasing Minimum Support Price and stocking up of foodgrains by the government could be some of the main factors for the continuing surge in food prices, warn experts. As the government increases MSP and other subsidies, it creates a disbalance in market demand and supply. Since farmers get relatively lower market prices, the government is forced to purchase the surplus which farmers are not able to sell in the market. Although the government distributes these procured food products through its schemes like the Public Distribution Scheme, the stock keeps increasing and so do the prices. Moreover, increase in financial costs like interest rate, transportation expenses, middlemen commission, cold storage, and the cascading effect of regular inflation add to the already existing surge of food prices. In addition to this, lower natural productivity due to climatic and environmental factors makes it more costly to produce the same quantity of food products.

FUTURES TRADING

While soaring food prices threaten food security globally, large food trading firms are profiting. These companies bet on the direction of food prices by storing or trading substantial amounts of goods – making big financial gains as a result. This is called futures trading, a phenomenon initially limited to financial assets but now has taken a grip of the food industry as well. Futures trading in key farm commodities in India has seen a mixed response. On one hand, experts believe that speculation ruins market equilibrium and thus contributes to price fluctuation. On the other hand, many believe that the lack of futures trading will crimp the use of risk management tools such as hedging across the food supply chain, spurring inventory cuts as forward purchases get scaled back. As markets will remain clueless about shortfalls and excesses, it could create more volatility in prices.

CONCLUSION

As food inflation continues, we can direct efforts towards rationalized and future-oriented schemes to salvage the situation. The government needs to plan at inter- and intra-national levels to ensure controlled and predictable policy outcomes. The overarching promotion of millets by the Indian government aimed at increasing sustainability, encouraging domestic production and introducing a cheaper crop in household diets; but due to its hype, millet prices have skyrocketed and the policy is unable to fulfill its primary objectives. Other initiatives like scientific and accessible storage and transport facilities will help ease the supply chain and logistical expenses, thus reducing the prices. Moreover, accurate and readily available meteorological predictions, innovative mechanisms like soil testing, scientific farming, and crop insurance can be used to prevent crop failures. Addressing food inflation requires a multifaceted approach that encompasses rationalized policies, sustainable agricultural practices, and innovative solutions to stabilize prices and ensure food security for India's growing population.


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