The Food Price Puzzle: Understanding Food Inflation and Its Control Measures

Introduction

At first glance, India's retail inflation for April seemed optimistic. The headline Consumer Price Index (CPI) inflation rate decreased marginally to 4.83%, the lowest level in 11 months. Beneath this seemingly encouraging trend was a worrying increase in food costs. The significant increase in food costs sparked concerns despite the general slowing of inflation, suggesting possible problems in the food supply chain or underlying structural problems in the agriculture industry. The aforementioned paradoxical position highlights the intricate factors that shape India's inflation landscape, wherein apparent improvements in macroeconomic indices conceal underlying concerns. Policymakers and other stakeholders must comprehend the nuances of this phenomenon to devise effective strategies for resolving the Indian economy's long-term structural imbalances as well as its short-term price swings.

What are the Recent Trends in Overall Inflation and Food Prices?

Food costs

• For rural customers, price increases were 8.75%, 19 basis points more than for urban consumers.
• The heaviest food group, cereals, saw a rise to 8.63%.
• The average price of wheat and rice increased significantly year over year, according to statistics from the Department of Consumer Affairs.
• Due to high temperatures, vegetables had double-digit inflation for the sixth straight month, reaching 27.8%.
• Long-term double-digit inflation in pulses continued into the eleventh month.

Consumers in rural areas

• The rural CPI was 5.43%, far higher than the urban rate of 4.11%.
• The difference illustrates the effects of elements like a typical monsoon and hot weather, which are especially difficult for rural communities.

What are the factors that contribute to India's elevated food inflation despite Falling overall Inflation?

Disruptions in the supply chain:-such as traffic jams or unrest in the agricultural markets can cause shortages of food and an increase in prices. Extreme weather events might further aggravate these disruptions by influencing agricultural productivity.

Increased Demand:- As a result of growing urbanization and rising affluence, there may be a greater demand for some foods, which would drive up costs. The demand for food is also rising due to demographic factors like population expansion, which may surpass supply in some areas or for particular goods.

Government regulations:- Price controls, export limitations, and procurement regulations are examples of government actions that can cause distortions in the food market, lead to supply and demand imbalances, and exacerbate inflationary pressures.

Cost of Production:- Variations in the cost of fuel, fertilizer, and seeds can affect farmers' costs of production, which raises the price to consumers.

Monsoon Variability:- The monsoon season provides a significant portion of the water needed by India's agriculture industry. Crop yields can be impacted by monsoon pattern variability or abnormalities, which can cause changes in food prices.

Global Prices for Commodities:- India is a net importer of several food items. Domestic food costs can be affected by shifts in the price of commodities globally, which might be impacted by worldwide demand-supply dynamics or geopolitical events.

Structural Problems:- Inefficiencies and price volatility are caused by structural problems in the agriculture industry, which include poor productivity, inadequate infrastructure, and fractured supply networks.

What are the Different Indices through Which Food Inflation is Measured in India?

Consumer Prices Index (CPI):-

• One of the main indices used to track inflation in India is the Consumer Price Index (CPI). It tracks shifts in the costs of a variety of household-consumed products and services.
• Food and drink make up a sizable section of the CPI, making up a large percentage of the index as a whole. Food products that fall under the food and beverage category include grains, legumes, fruits, vegetables, and meats.
• The weighted average price variations of the various food products eaten by urban and rural households are used to construct the CPI for food and drinks.

The WPI, or wholesale price index:-

• Changes in wholesale product prices are tracked by the Wholesale Price Index (WPI). Compared to the CPI, it covers a wider variety of commodities, including manufactured goods as well as raw materials.
• A significant portion of the WPI is made up of food articles, which comprise staple foods including grains, pulses, fruits, vegetables, and animal products.
• Insights into the inflationary pressures experienced by producers and wholesalers are provided by the WPI for food articles, which represents price fluctuations at the wholesale level.

Food Price Indices by Region:-

• India creates several food price indices for rural and urban areas in addition to national-level indices like the WPI and CPI.
• These indices offer a more detailed perspective on changes in food inflation by accounting for the differences in price dynamics and consumption patterns between rural and urban populations.
• Policymakers may better customize measures to address particular concerns by using the rural and urban food price indexes, which record changes in food costs across different areas and demographic categories.

Level of State Price Indices:-

• To track inflation locally, a few Indian states also create their pricing indexes.
• State-level indices, which take into consideration variables including local market dynamics, transportation costs, and production patterns, offer specific information on trends in food prices.
• These indices are used by state governments to evaluate how laws and outside variables affect food prices within their borders. This allows for more focused responses to combat inflationary pressures.

What are Various Government Initiatives to Control Food Inflation?

• Subsidized Commodities: To keep prices stable, the government is expanding the distribution of subsidized vegetables like tomatoes and onions through its network and releasing supplies of sugar and wheat.
• Reduction of Import Duty: The government is encouraging farmers to cultivate pulses and lowering import charges on specific pulses to increase local availability to increase domestic output.
• Export Prohibitions: Since May 2022, exports of wheat and broken rice have been prohibited, to preserve a surplus of domestic rice supply and bring down prices.
• Prohibition of Stockpiling: To avoid excessive stockpiling, regulations set a limit on wheat inventories of 3,000 tonnes for traders, millers, wholesalers, and retail chains, and 10 tonnes for smaller retailers and stores.
• Operation Greens: To reduce price swings, this program attempts to stabilize the nation's supply of tomatoes, onions, and potatoes (TOP) crops year-round.
• Floor Prices: In the face of increasing onion prices as a result of delayed kharif onion arrivals, the government set a minimum export price (MEP) of $800 per tonne (?67 per kg) on onion exports from October 29 to December 31, 2023, to guarantee enough local onion supply.

Conclusion

In conclusion, the difficulty of maintaining price stability in the agriculture sector is shown by India's recent experience with food inflation notwithstanding a decline in overall inflation. Policymakers and consumers face serious issues as a result of the ongoing rise in food costs, even in the face of minor decreases in headline inflation rates. The high pressures on food inflation are caused by several factors, including swings in input costs, environmental unpredictability, government interventions, interruptions in the supply chain, and rising demand. The government has launched several attempts to solve these issues, including export bans, import tariff reductions, stockpiling laws, subsidies, and market-stabilizing operations like Operation Greens. Long-term sustainability still depends on resolving the underlying structural problems in the agriculture industry, even as these steps seek to reduce short-term price volatility and guarantee food security.

It is possible to reduce inflationary pressures and promote a more robust and equitable food system by implementing targeted policies and investments that improve productivity, infrastructure, and market efficiency. By comprehending the complex interactions between the variables causing food inflation and putting into practice comprehensive

Reference

• The Hindu:- https://www.thehindu.com/business/Economy/retail-inflation-eases-to-483-in-april/article68171122.ece
• The Economic Times:- https://economictimes.indiatimes.com/news/economy/indicators/indias-wpi-inflation-accelerates-to-1-26-in-april-compared-with-0-53-in-march/articleshow/110104794.cms?from=mdr
• Hindustan Times:- https://www.hindustantimes.com/business/indias-retail-inflation-eases-slightly-in-april-surge-in-food-prices-continues-101715604969287.html
• Mint:-https://www.livemint.com/economy/retail-inflation-eases-slightly-in-april-food-inflation-rises-11715604691276.html
• The Financial Express:- https://www.financialexpress.com/policy/economy-food-inflation-rose-marginally-to-8-7-in-april-3486500/