Retail inflation in July and August was around 3.6%, a sharp decline from an average of 5% in the preceding 12 months, primarily on account of a high base last year.
So any euphoria over inflation going below the Reserve Bank of India’s (RBI) target of 4% in those two months was unwarranted. September estimates suggest that inflation may have stabilized at around 5% or above, as has been the story of the past two years.
What should worry policy makers is not just the overall inflation rate, which remains above RBI’s comfort zone, but food inflation, which was above 9% in both rural and urban areas last month. Barring July-August, food inflation has hovered in a range of 8-9% since November 2023.
Controlling food inflation is a challenge and it is amply clear that monetary policy is unlikely to be effective. Nor is the chief economic advisor’s suggestion of excluding food from RBI’s inflation targeting framework relevant, given the disjunction between RBI’s objectives (and policy instruments) and the nature of food inflation in the country.
There has been much discussion on the seasonal nature of food inflation, but this is at best a partial explanation of why it has been so stubborn.
While vegetable inflation in September was reported at 36%, much of it’s on account of tomato, onion and potato prices, which make up almost a third of the weight of vegetables in the CPI consumption basket. In September, their prices were 42%, 66% and 65% above 2023 levels, respectively, despite government efforts to hold them in check.
However, two other weighty food items that continue to report high inflation are cereals at 7% and pulses at 10%. Together these account for a fourth of the food basket.
Unlike perishable vegetables, these can be stored and official estimates have been claiming record production; cereal output has outpaced population growth over the last five years, suggesting an increase in per capita availability. Yet, inflation in pulses has remained 10% or more for the last 16 months and cereal inflation has averaged 11% in the last two years.
Even the Wholesale Price Index (WPI) confirms an inflationary spike in these commodities. Even though overall WPI inflation was just 1.82% last month, food inflation jumped to 11.5%, with cereal inflation at 8% and pulses at 13%.
For both rice and wheat, WPI inflation was 8%, while vegetable inflation was 49%, with tomatoes, onions and potatoes at 75%, 79% and 78% respectively. Clearly, food inflation is broader based than what seasonality would suggest. What should also worry policymakers is the outlook for inflation in the near future.
Globally, the Food and Agriculture Organisation highlights a rising trend in overall prices in recent months. Cereals, particularly wheat, are likely to face price pressures, as also vegetable oils.
But why are food prices so stubborn? Part blame can be assigned to uneven supply arising out of crop failures or losses due to extreme weather events. These have now become more frequent even though we have not had a wide drought in recent years.
But some of it has also been due to ad-hoc signalling by the government. The past three years have seen frequent interventions in Indian markets for cereals and vegetables.
Knee-jerk reactions to price spikes have included trade restrictions, stock limits and surveillance. While the purpose has been to tame retail prices, in most cases they worked as perverse incentives to producers, who found little reason to raise production.
Finally, more so for perishables but also for other crops, supply-chain efficiency requires large public investments in creating well-regulated markets and setting up storage facilities and distribution networks.
Food inflation remains a problem not just for inflation targeting, but also for most of the Indian population, with food still accounting for almost half the country’s consumption basket and two-thirds of it for the poorest.
Excluding food inflation from RBI’s policy framework will not solve this problem. We need ways to contain it. This requires large investments not just in supply chains but also in research to develop climate-resilient crop varieties. Above all, it requires government policy to be producer-centric rather than consumer-focused for it to be effective.
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