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Recent data indicates that food inflation nearly doubled in June by reaching 8.3% year-on-year. Despite this, economic experts are hopeful that food inflation will decrease in the near future. They attribute their optimism to the expectation of a normal monsoon, which should bring some relief to consumers by lowering food prices.
The Impact of Monsoon on Food Prices
Vegetable prices which have been rising at double-digit rates for eight months and persistent food grain inflation are significant concerns. However, experts like Dharmakirti Joshi, Chief Economist at CRISIL believe that the deficiency in June rains is not a major issue. The more crucial rains in July and August for the kharif season are anticipated to improve agricultural output thereby helping to lower food inflation.
Detailed Breakdown of Inflation Across Food Segments
According to government data, retail inflation has increased across various food segments on a month-on-month basis. This includes categories like cereals and their products, meat and fish, eggs, milk and dairy products, oils and fats, fruits, vegetables, pulses and their products, sugar, spices, and prepared snacks and sweets. While there is a hopeful outlook for a reduction in food inflation due to anticipated good monsoon rains, the persistent high inflation across all food segments and other factors may delay any potential rate cuts by the central bank.
Agricultural Commodities Drive June Inflation: Importance of Agricultural Investment
Economic experts have pointed out that the primary cause of the June inflation spike is the rise in prices of agricultural commodities. They emphasize the need for increased government investment in agriculture to fortify the sector. According to Ashok Gulati, a professor at the Indian Council for Research on International Economic Relations (ICRIER), nine out of the top ten commodities contributing to the Consumer Price Index (CPI) inflation in June were agricultural products especially vegetables and pulses. He argues that maintaining a high repo rate by the Reserve Bank of India (RBI) will not effectively reduce this type of inflation. Instead, he suggests that more investment in agricultural research and development (R&D) is needed to enhance productivity amidst climate change along with creating more efficient value chains.
Challenges Beyond Food Inflation
Experts also caution that core inflation which excludes food prices and represents the dominant part of non-food inflation might rise in the upcoming months. This potential increase is attributed to the recent rise in international freight costs, crude oil prices and domestic telecom prices. M Govind Rao, a member of the Fourteenth Finance Commission and former Director of the National Institute of Public Finance and Policy expressed concern that achieving the RBI’s four percent inflation target remains a distant goal. He noted that this situation could delay any potential rate cycle by implying that favourable economic conditions and interest rate cuts may take longer to materialize. While addressing food inflation through increased agricultural investment is crucial, experts also highlight the broader economic challenges that could continue to influence inflation rates in the near future.
Expectations of Stabilizing Food Prices and Inflation
- Food Prices Predicted to Stabilize: Sanjeev Agrawal, President of the PHD Chamber of Commerce and Industry has expressed optimism that food prices will stabilize in the coming months. He anticipates that the inflation rate will also soften and settle between 4 and 4.5 percent. He pointed out that the Consumer Price Index (CPI) inflation for June was primarily driven by a rise in Food and Beverages inflation which increased from 7.9 percent in May 2024 to 8.4 percent in June 2024. Overall inflation saw a slight increase from 4.8 percent in May 2024 to 5 percent in June 2024.
- Importance of Kharif Sowing Season: Industry experts emphasize that the progress of the kharif sowing season is crucial for reducing food inflation. A good harvest during this season could help control food prices. They also noted that global commodity prices which had been rising in the first half of 2024 have started to ease over the past month. However, they warn that external risks from ongoing geopolitical tensions must be monitored as these could disrupt supply chains and affect commodity prices.
Impact of Base Effect and Future Projections
Looking ahead, experts expect a favourable base effect to continue until July 2024 which should help mitigate potential price pressures. Rajani Sinha, Chief Economist at CareEdge Ratings predicts that food inflation will moderate as the base effect comes into play and new harvests enter the market. For the fiscal year 2025, she expects inflation to average 4.8 percent. If food inflation decreases as anticipated, she believes the Reserve Bank of India (RBI) may cut the policy interest rate by a modest 50 basis points in two stages during the second half of the fiscal year. While current inflation is driven by rising food prices, a combination of favourable agricultural conditions and easing global commodity prices is expected to stabilize inflation in the near future.
Unpacking the Factors Driving India's Food Inflation
Despite a decline in overall inflation, India's food inflation remains stubbornly high. What factors are contributing to this trend? A closer examination reveals a complex interplay of challenges. Firstly, temperature and weather challenges are taking a toll on crop yields. Adverse weather conditions, such as a weak monsoon and heatwave predictions are affecting cereals, pulses and sugar production. This supply shortage is driving up prices with cereal and pulse inflation reaching double digits in April 2024. Secondly, fuel price increases are having a ripple effect on food inflation. A 1% rise in fuel inflation leads to a 0.13% increase in food inflation with the impact lingering for 12 months.
Thirdly, supply chain disruptions are exacerbating the issue. Transportation constraints, labour shortages and logistical challenges are reducing food availability by leading to higher prices. The lack of efficient storage facilities is resulting in the wastage of perishable items by contributing to double-digit inflation in vegetables. Lastly, global factors are also at play. While international food prices have decreased, India's food prices remain high due to limited transmission to domestic markets. The ongoing Russia-Ukraine war and India's reliance on imports for edible oils and pulses are further complicating the situation. India's elevated food inflation is a multifaceted issue driven by weather challenges, fuel prices, supply chain disruptions, and global factors. Addressing these challenges is crucial to mitigating the impact on Indian consumers.
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