India is currently grappling with a significant rise in food inflation, which is impacting its overall Consumer Price Index (CPI) and creating challenges for both policymakers and consumers. Recently, September’s inflation rate reached 5.5%, while food inflation surged to 9.2%. This rise highlights the critical role that food prices play in shaping India’s inflation landscape. The Consumer Food Price Index (CFPI), a crucial component of the CPI, comprises nearly 39% of the total index, underscoring the profound influence of food prices on overall inflation.
How Food Inflation Influences Overall Inflation
The Consumer Price Index (CPI) serves as a measure of retail price changes in goods and services for a defined population. It reflects the cost of living by analyzing a basket of goods and services that people commonly consume. In India, the CFPI constitutes 39% of the CPI, with food and beverages accounting for 45%. Staples such as tomatoes, onions, and potatoes (TOP) alone contribute 4.8% to the food and beverage category and 2.2% to the overall CPI. Given this heavy reliance on food prices, fluctuations in food costs have a considerable impact on India’s inflationary trends.
- Over the past 100 months, CPI inflation exceeded the 4% target set by the Reserve Bank of India (RBI) 72% of the time. It even surpassed the upper limit of 6% in 28% of cases.
- In September 2024, vegetables contributed a staggering 63% to food inflation, with price increases year-on-year of 42.4% for tomatoes, 66.2% for onions, and 65.3% for potatoes.
Causes of Price Fluctuations in Essential Vegetables (Tomatoes, Onions, Potatoes)
The TOP crops are particularly susceptible to price fluctuations due to their unique characteristics and vulnerabilities:
- Short crop cycles: These vegetables have short growing seasons, leading to supply shortages during lean periods and sharp price rises. Conversely, bumper harvests during peak seasons often result in distress prices due to oversupply.
- Perishable nature: Tomatoes are highly perishable, and onions semi-perishable, leading to wastage during periods of surplus and sudden price spikes in times of scarcity.
- Storage challenges: Storage facilities for these crops are limited, with only rabi onions being stored from March to October to provide a buffer. The lack of widespread storage infrastructure for tomatoes and potatoes exacerbates price volatility.
- Regional production concentration: Concentrated production in specific regions makes supply chains vulnerable to weather disruptions like heatwaves and floods, which can drastically impact yield and prices.
Production and Status of TOP Crops in India
India is a major global producer of these staple crops. The 2022-23 production estimates showcase India’s position as a key player:
- Tomatoes: 20.4 million metric tonnes (MMT)
- Onions: 30.2 MMT, making India the world’s largest producer with 28.6% of global production
- Potatoes: 60.1 MMT, placing India as the second-largest producer of both tomatoes and potatoes globally
Policy Recommendations from the RBI to Curb Price Volatility
To address the challenges posed by fluctuating food prices, the Reserve Bank of India (RBI) has proposed several policy measures:
- Agricultural market reforms: There is a need to develop private markets for agricultural produce, enhancing competition and offering farmers more competitive selling options. Improvements in Agricultural Produce Market Committees (APMCs) are also essential.
- Futures trading: The reintroduction of potato futures trading (banned in 2014) and the potential launch of onion futures could aid in price discovery and mitigate market risks.
- Storage expansion: Increasing cold storage capacity across the country would help prevent crop loss during peak production periods. Currently, potato storage is concentrated in Uttar Pradesh and onion storage in Maharashtra, underscoring the need for a more distributed storage network.
- Processing and productivity enhancement: Investments in food processing facilities and productivity improvements can stabilize supply and reduce waste, further curbing price volatility.
Broader Economic Impacts of Rising Food Prices
The recent surge in retail inflation, driven largely by food prices, has pushed inflation rates to a nine-month high in September. Wholesale price inflation, which represents factory gate prices, has also increased. According to government data from October 14, the wholesale price index (WPI)-based inflation rose to 1.84% in September, compared to 1.31% in August. This rise is largely attributed to the sharp inflation in food items, with vegetables showing a 48.73% inflation rate in September compared to a -10.01% rate in August.
- Potato and onion prices remained elevated, with 78.13% and 78.82% inflation rates respectively in September, signaling severe price pressures within these essential items.
- Given that food constitutes a significant part of household expenses for a majority of India’s 1.4 billion people, this inflation surge has substantial implications on the country’s inflation index.
Challenges in Addressing Food Inflation Through Monetary Policy
With food accounting for such a large share of the CPI, it becomes increasingly challenging for monetary policy alone to control inflation. The Reserve Bank of India (RBI) primarily considers retail inflation while setting monetary policy. Recently, it kept the repo rate unchanged at 6.5%. However, the RBI’s Monetary Policy Committee (MPC) has cautioned about the uncertain trajectory of food prices, which, alongside geopolitical tensions, could impact core inflation and pose a risk to crude prices.
- To consider a rate cut in December’s policy review, either CPI-based inflation will need to fall significantly below 5%, or GDP growth for Q2FY25 would need to considerably underperform expectations.
External Factors and Risks to Inflation
Aside from domestic factors influencing food inflation, there are external risks that could have further impacts. The potential for escalating conflicts in West Asia threatens to disrupt supply chains and increase global energy prices, which would have ripple effects on India’s economy. External inflationary pressures from global energy prices and trade disruptions highlight the complex nature of inflationary risks and their impact on domestic economic stability.
Future Measures and Long-term Recommendations
To combat the ongoing issue of food inflation, experts recommend several long-term measures:
- Establishing a dedicated agency focused exclusively on monitoring and managing key crops like tomatoes, onions, and potatoes. This agency would be staffed by experts able to address supply chain issues promptly and effectively.
- Updating CPI food weights to better reflect current consumption patterns. Replacing outdated weights could provide a more accurate picture of inflation, especially as the current weights may overestimate food’s influence in the CPI.
- Encouraging food processing: A portion of tomato production, for instance, could be converted into paste or puree, while onions could be dehydrated into flakes or powder. This would not only reduce wastage but also provide a buffer against sudden price fluctuations.
India’s food inflation scenario underscores the complex interaction between supply chain vulnerabilities, crop seasonality, and external factors such as climate and geopolitical risks. With food prices heavily influencing the CPI, addressing food inflation requires more than just monetary policy adjustments; it demands structural reforms in agriculture, investment in storage and processing infrastructure, and a balanced approach to managing both domestic and international pressures. The impact of these efforts will be crucial in stabilizing inflation and ensuring a sustainable economic environment for India’s vast population.