The Role Of Mark-Ups In Post-Pandemic Food Inflation

The Covid-19 crisis, particularly when it first hit in 2020, pushed up inflation across a number of categories, including food items. These higher food prices contributed meaningfully to the jump in inflation over the past 18 months, although it wasn't the only contributor as core inflation rose too.

A number of factors, ranging from disruption in transportation to shortage of workers, were responsible for higher food prices. One such factor was the higher mark-up charged by retailers during the first wave of the Covid crisis, showed a study from the Reserve Bank of India.

Using daily data on retail and wholesale prices of 22 food items, the RBI study assessed the impact of the pandemic on food price mark-ups in India across the first and second waves of the Covid crisis.

The increase in margins was particularly high across pulses, edible oils and potato. In contrast, the lockdown did not have any significant impact on margins for cereals and other food items.

Margins increased by 19.3% for pulses, 11.2% for edible oils and 12.3% for potato compared to their respective baseline averages.

The divergence in mark-ups, according to the study, highlighted the difference in price elasticity and supply chains of different commodities.

For instance, the pandemic prompted people to hold additional stocks, which pushed up mark-ups as demand surged. This, however, only impacted non-perishables such as pulses and edible oils. While cereals should have been impacted by similar demand-stocking dynamics, the government's buffer stock may have acted as a balancing factor.

In the case of pulses, the impact was particularly stark on the back of a generally tight domestic supply-demand situation, the study said.

Similarly, for edible oils, where a major portion of domestic demand (around 60%) is met through imports, higher demand and stocking pushed up margins.

Margins in potatoes increased and stayed firm during the lockdown despite it coinciding with the rabi arrival period, as crop damage in certain states skewed supply-demand dynamics.

The mark-ups differed across perishable items as well.

Milk prices, for instance, didn't see much impact because of the robust supply chain. Here, formal supply is backed by informal channels of supplies from a large number of small dairies in both urban and rural areas. "Thus, surplus domestic production together with faster supply response resulted in only a minor impact of the lockdown on milk prices."

Among vegetables, onion prices, on account of a seasonal correction, remained in check.

However, tomato prices and margins did show a sudden and big pickup as the lockdown began. These corrected relatively quickly.

The study, when extended to the period of the second wave of Covid infections, showed different outcomes. Here, due to the more localised nature of lockdowns, mark-ups were far lower.

Still, the commodities that saw higher mark-ups in the first wave did see some increase in margins and prices again.

Pulses saw an increase of 5.3% in margins over the baseline. Edible oil saw a 7.9% increase in margin.

Margins declined in the case of cereals and vegetables reflecting large buffer stock of food grains and better supply management, the study said.