What is meant by food inflation?
Global food inflation raises the prices of edible oil and sugar, while MSP rises are another factor driving sugar price inflation. Food inflation feeds into non-food inflation and aggregate CPI inflation. According to Trading Economics global macro models and analyst forecasts, food inflation in India is predicted to reach 5.50 percent by the end of this quarter. According to our econometric models, India Food Inflation is expected to trend at 5.50 percent in 2023 and 4.30 percent in 2024. India has officially restricted durum wheat exports, placing it in the ‘prohibited’ category as of May 13.
One reason that has frequently been cited as causing food inflation in India is increased income and diet diversification, which increase demand for high-value food goods and hence add to inflationary pressures. Bhattacharya and Sen-Gupta (2015) compute the demand-supply gap for important food commodities such as cereals, pulses, vegetables, fruits, milk, meat, and fish, and find empirical evidence for this concept. The expenditure elasticities for all of these goods are computed using household consumption expenditure survey data from National Sample Survey Organizations for 2009-10. All of the estimated expenditure elasticities are positive, with those for milk, vegetables, and fruits above one, meaning that a 1% rise in household expenditure corresponds to a 1% increase in demand.
Although the elasticity for meat and fish is less than one, it is high enough to induce a large increase in demand with growing food spending. High spending elasticities of vitamin and protein-rich commodities suggest increased demand pressure for these commodities in an expanding economy with rising per capita income. A Structural Vector Autoregression (SVAR) framework is generated using monthly data to assess the dynamic inter-linkages between food inflation, key input price inflation, demand from the non-agricultural sector, and global food price inflation. According to the analysis, agricultural wage inflation is a universal driver of component and aggregate food inflation.
Wage inflation accounts for 10% of the variation in the wholesale price index (WPI) for food ten months following a shock. Wage inflation’s share of total food inflation more than doubled (21%) in the post-MGNREGA period. The study reveals that foreign prices have a modest impact, save for tradeables like edible oil (34%), and sugar (10%), and that fuel inflation has a minor impact. Increases in minimum support prices (MSP) have influenced inflation in rice, wheat, pulses, and sugar, according to a panel regression analysis.
Different components of food inflation are driven by a diverse set of circumstances. The main causes of wheat inflation are increases in production costs and MSP, whereas inflation in milk, vegetables, meat, and fish is driven by input cost inflation and a positive demand supply imbalance. These two elements, coupled with MSP inflation, are mostly responsible for pulse inflation. Global food inflation raises the prices of edible oil and sugar, while MSP rises are another factor driving sugar price inflation.
Food inflation feeds into non-food inflation and aggregate CPI inflation:
A Structural Vector Error Correction model is used to predict the effects of rising food inflation on the overall inflationary scenario (SVECM). Food inflation explains 40% and 61% of non-food and aggregate CPI inflation fluctuations ten months after a shock, respectively. The transmission to non-food inflation comes through increases in labour input costs, substitution effects, and the real income effect of food producers (Anand et al., 2010; Aoki, 2001). Aside from direct pass-through to aggregate inflation via food’s share of the consumption basket, it also rises indirectly via non-food price increases.
Supply side and external factors affecting food inflation:
Fuel and agricultural wage inflation and international food price surge.
On the supply side, increases in major input prices, such as fuel and agricultural salaries, have impacted commodity prices and aggregate food inflation. The study supports the commonly hypothesised link between the increase in agricultural pay growth after 2007, and the countrywide implementation of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) in 2008, with a structural break in wage inflation found in 2008. Fuel inflation can potentially effect food inflation due to the recent deregulation of critical fuel prices in India, as fuel is required to power machinery and transportation. Given increased agricultural trade integration, the 2008 and 2010 spikes in international food prices are another element impacting domestic food inflation.
According to a Nomura report, the Indian government’s move to ban wheat exports may prove counter-productive, as the export ban may exert upward pressure on global wheat prices, which were already rising for other reasons, such as higher energy costs initially and the Russia-Ukraine war later, and have risen further in anticipation of this ban. “The impact of the wheat export prohibition on domestic food inflation in India is likely to be minimal.” This export embargo is a preventative measure that may keep local wheat prices from rising significantly; but, with domestic wheat output likely limited by the heatwave, local wheat prices may not fall significantly.
If India’s wheat prohibition raises the price of replacements like rice, other food costs may rise,” stated Sonal Varma, Nomura’s head economist for India and Asia ex-Japan, in a recent co-authored note with Aurodeep Nandi. India has officially restricted durum wheat exports, placing it in the ‘prohibited’ category as of May 13. Shipments will be permitted if irrevocable letters of credit (LOC) were issued prior to the notification date. However, the government is willing to enable shipments to adjacent and other vulnerable developing nations to meet their food security needs, but their respective governments must submit a separate request.
The decision to limit wheat exports was spurred by soaring inflation in India, which has risen from 2.26 percent at the start of 2022 to 14.55 percent presently. Retail inflation also reached an eight-year high of 7.79% in April, owing to increased food and fuel prices. According to sources, Bangladesh is India’s top wheat export destination, followed by Sri Lanka, the United Arab Emirates, Indonesia, Yemen, the Philippines, and Nepal. Except for Australia and India, most Asian economies rely on imported wheat for domestic consumption and are vulnerable to increasing global wheat prices, according to Nomura, even if they do not directly import from India.
According to the USDA, India produced approximately 109.6 million metric tonnes (mt) of wheat in 2021-22, with 8.2 million mt exported, up from 2.6 million mt in 2020-21. According to USDA estimates, India is the eighth largest wheat exporter in the world, accounting for 4.1% of total worldwide wheat exports in 2020-21.
However, India’s export prohibition is currently in effect indefinitely. According to sources, the government’s notification did not include a domestic wheat price target level or local stock availability that would result in the embargo being lifted. Previously, India restricted wheat exports in February 2007 and maintained the status quo for more than four years before relaxing the ban in September 2011 due to record output and to free up storage space. However, there was a condition that exports not exceed two million tonnes. A restriction on non-Basmati rice exports was enacted in October 2007, was temporarily withdrawn before being restored in April 2008, and was finally lifted in September 2011. “With domestic cereal price inflation still on the rise, the current export prohibition could be in place for a long time,” Nomoura warned.