Editorial of the Day (23rd Jan): Drivers of Food Inflation

Context: World food prices based on the FAO index have been declining since November 2022, reaching a 25.8% drop compared to the March 2022 peak. While India’s domestic food inflation remains stubbornly high.at 9.5% in December 2023.

De-globalization of Food Inflation in India

• Limited International Price Transmission: One key reason for this divergence is to limited transmission of international prices to domestic prices through imports and exports.
• Government Interventions: The Indian government’s policies, such as export bans on wheat, non-basmati white rice, sugar, and onion, and low import duties on major pulses and crude edible oils, have shielded the domestic market from global price fluctuations.
• Effect of Global Supply Disruptions: Initially, disruptions like the COVID-19 pandemic and the Russia-Ukraine conflict had led to a rise in domestic prices of commodities like edible oils and cereals. However, the current low global prices and government measures have minimised the threat of imported inflation.
• Impact of Regional Conflicts: Conflicts like the Houthi militants’ attacks in the Red Sea have had minimal impact on India’s food imports, as most imports do not pass through the affected routes.

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Factors Driving Food Prices in India Now

• Government Interventions: The Modi government’s policies, such as export bans on wheat, non-basmati white rice, sugar, and onion, and reduced import duties on major pulses and crude edible oils until March 31, 2025, have insulated domestic food prices from global trends.
• Limited Impact of Global Supply Disruptions: Despite initial impacts from global events like the COVID-19 pandemic and the Russia-Ukraine conflict, current low global prices, combined with government measures, have mitigated the threat of imported inflation.
• Domestic Production Emphasis: The course of food inflation in India is primarily influenced by domestic production factors rather than global factors. The focus is on crops like cereals, pulses, and sugar.
• Cereal and Pulses Inflation: As of December, retail cereal and pulses inflation stood at 9.9% and 20.7% year-on-year, respectively, both higher than the overall food inflation rate of 9.5%.
• Government Stock Levels: Wheat and rice stocks in the central pool are at a seven-year low, impacting market prices.
• Area Sown Under Wheat: The area sown under wheat for the current season has surpassed last year’s figures, crossing 34 million hectares, which is above the normal five-year average of 30.7 million hectares.
• Climatic Sensitivity of Wheat: Wheat yields are sensitive to climatic conditions, particularly heat stress during the grain formation stage in March. Any adverse weather can affect yields and, consequently, prices.
• Pulses Prices and Sowing Area: Prices for pulses like arhar and chana are significantly higher compared to the previous year, and the area sown for pulses this rabi season is less compared to 2022-23.
• Sugar Mills’ Stock Levels: Sugar mills started the new season (October 2023) with six-year-low stocks, with uncertainty over actual production levels by the end of the crushing season in April-May.
• External Factors with Limited Impact: The ongoing conflicts in the Red Sea and disruptions in Suez Canal have had minimal impact on India’s food imports. Imports of essential items like pulses and edible oils are largely unaffected.
• Sunflower Oil Import Challenges: Sunflower oil imports from Russia and Ukraine are facing logistical challenges, requiring longer shipping routes and increased freight costs.

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