The Conundrum Of Low Food Inflation In India Set To Continue
Over the years, India has seen many a protest over rising prices of food items like onions and tomatoes. However, over the last two years, the situation has been dramatically different. Prices of food items have increased too slowly at times, leaving policymakers confused and farmers distressed.
This is unlikely to change in the near term.
An absence of the seasonal rise in food prices, together with strong output seen during the Kharif season, could mean that food inflation will remain low for the remainder of this year. While this may help keep overall inflation in check and allow policymakers to keep interest rates on hold, it could reignite concerns about distress in parts of India’s rural economy.
At the crux of the current inflation scenario is a simple demand and supply equation, said Vasant P Gandhi, professor at the Centre For Management In Agriculture, IIM Ahmedabad. In an economy which was battling food inflation in double digits until a few years ago, demand was outpacing supply, leading to very high prices of agricultural commodities. Farmers responded to this by increasing supply and were aided by technological advancements and agricultural reforms, said Gandhi. “The result is that supply growth appears to have outstripped the pace at which demand has increased.”
Record Kharif Season Output Seen
That demand-supply imbalance is visible in this year’s Kharif season.
The first advance estimates released by the Agriculture Ministry at the end of September showed that production of kharif crops is expected to hit 141.59 million - 0.86 million tonnes higher than last year. In particular, production of rice, sugarcane and oil seeds is seen higher than last year. The output of key pulses, which has surged over the last few years, remains high albeit lower than last year.
Domestic production of sugar and pulses has risen to record levels, says Bimal Kothari, vice chairman at the India Pulses and Grains Association. Wheat and rice are also seeing very high production. Domestic production of oil seeds, too, has seen a significant increase, Kothari told BloombergQuint.
Domestic food production is at historical levels. Favourable monsoons, and several government schemes and incentives have also aided in higher production.Bimal Kothari, Vice Chairman, India Pulses and Grains Association
Not Just Excess Supply
Others say the low food inflation is not just a supply-demand problem.
Excess supply in agricultural commodities is not broad based, said Siraj Hussain, former agriculture secretary and senior fellow at ICRIER. While sugarcane, wheat and rice are in excess supply, pulses produced are just sufficient to meet domestic demand. Edible oil, on the other hand, continues to be imported to meet the domestic shortfall, Hussain pointed out. “Several other factors too appear to be responsible for depressed agricultural prices.”
Among them could be the low food prices prevailing globally.
The impact of interlinkages between global and domestic food prices can not be ignored, said Soumyakanti Ghosh, chief economist at State Bank of India. Globally, depressed commodity prices have restricted the market for agricultural exports for several years, he said. A shift in consumption patterns and consumer food preferences could also be contributing to the low food inflation in the economy, he added.
Economists at HDFC Bank have a different view.
The correlation between Indian food prices and global food prices is weak, said a report from the bank’s treasury research team. Domestic factors such as supply, cost of production and the minimum support prices play a larger role, the bank said while adding that food inflation may pick up by the middle of 2019.
In our view, distress selling in response to temporary oversupply factors has been one of the key reasons for decline in food inflation. If we dig deep, the downside surprises in food inflation can largely be attributed to four components, vis-à-vis vegetables, sugar, pulses,and milk.HDFC Bank Report
Will Higher MSPs Help?
In July this year, the government announced relatively steep increases in the minimum support price for most Kharif crops. This, after a few years of very modest hikes in MSPs.
At present, the market prices of a number of Kharif crops are prevailing below the support prices. However, the ability of higher MSPs to translate into relief for the farm sector depends on the amount of procurement the government chooses to do.
Failing significant help from the government, concerns over rural distress may persist.
“In the context of the rural economy, while the agricultural output is rising, falling prices of agricultural commodities, from pulses, vegetables, and even livestock-output, has caused a decline in income and consequently lower demand for food, in turn pushing prices down further,” said HDFC Bank in its report.