India food inflation is coming under pressure again on back of tough weather conditions and geopolitical uncertainties impacting supplies, commodity prices and household budgets. Weak monsoon, improving El Nio prospects and uncertain global conditions are likely to keep food prices volatile in the coming months.
This development comes at a time when elevated food inflation continues to be an important aspect of India’s inflation outlook. As per a recent Financial Express report, food and beverages inflation is likely to stay high, with proteins and edible oils being some of the categories seeing price pressure.
Weak Monsoon Raises Food Inflation Concerns
The monsoon continues to be one of the largest factors influencing India’s agricultural economy. A considerable amount of the country’s cropping activity is either directly or indirectly reliant on monsoon rains and consequently, the economy of Indian agriculture is highly sensitive to the performance of the monsoon.
There are reports that the monsoon is quite weak for this year in India and this might affect the kharif crop production, as less and uneven rainfall can effect the moisture in the soil and thereby effect crop production.
The effect could be especially significant for items like, pulses, vegetables, soy beans, maize and oilseeds. A shorter than expected crop could reduce the quantity available in the market and cause an increase in wholesale and retail prices.
As a result, consumers may spend more on staples, in particular if multiple food groups have supply shocks occurring at the same time.
El Nio Adds Another Layer of Risk
The intensification of the El Nio weather phenomena is one of the other worries for India’s food inflation outlook. El Nio can have a bearing on the weather pattern across globe and was seen in the past as a key factor in the rainfall changes across few regions including South Asia.
In the case of India, the main worry is its possible influence on monsoon rainfall and the agriculture sector. If the rainfall deficit persists for too long, it may put a dampener on the country’s crop production and lead to heightened food-price fluctuation.
The effect won’t be the same for all commodities. One or two crops might still get a reasonably good supply, but others, as determined by distribution of rainfall, sowing practices and condition of the crop.
So even if headline inflation seems to be coming down, the prices of some food items may still jump around.
Geopolitical Tensions Could Increase Costs
While weather remains the domestic aspect, the “risks” to India’s food economy are being generated from outside by “geopolitical tensions”.
Disruptions in world conflicts or major trade routes may push up the cost of crude oil, freight rates, fertilisers and world commodities. Rising energy prices in turn could lead to higher transportation and logistics costs.
Another aspect to keep an eye on is edible oils. India relies heavily on imports to fulfill its own domestic edible-oil requirements. Consequently, any disturbance in the international supplies, shipping or commodities markets would also impact Indian domestic prices.
In addition the higher input costs will also have implications for farmers and food processors as this may feed through onto the costs of finished food stuffs.
Which Food Prices Could Rise?
Various food categories may continue to be exposed if weather and geopolitical risks are still at large.
Pulses: Production may be a little lower and arrivals a little later which would quickly tighten supplies and put upward pressure on prices.
Vegetables: Vegetables are very weather dependant. Heavy rains in some regions and lack of rain in others could ruin crops.
Edible oils: International prices, degree of import dependence and shipping costs might affect on domestic edible-oil prices.
Protein products: The prices of meat, fish and dairy products can be influenced by the costs of feed and transportation, and the availability of supplies.
Cereals Rice, wheat etc may also be under strain if weather impacts crop yields or in procurement.
The main issue is, if you see prices rising in many categories at the same time, then food inflation could become more widespread and sustained.
RBI Faces a Policy Challenge
The rise in food inflation in India is also a problem for the Reserve Bank of India (RBI). Food prices are a supply side phenomenon and as such monetary policy cannot directly influence problems related to bad monsoon or low output.
Yet, ongoing food inflation can impact headline CPI inflation and consumer expectations. Food-price developments thus matter to the RBI when evaluating the overall inflation path.
Persistent high food inflation could dampen scope for aggressive monetary easing and make monetary policymakers cautious.
Impact on Indian Households
Due to higher prices, food in India takes up a larger chunk of household budgets as food accounts for a large fraction of consumer spending in India.
For lower and middle income households increase in prices of vegetables, pulses, cooking oils and other commodities increases their disposables. Subsequently, they reduce expenditures in out-of-home categories like entertainment, restaurants, travel and other discretionary items.
This might impose a second-round effect on the overall consumption and economic growth.
Government Measures Will Be Crucial
The government can be key in reducing the effect of supply shocks, by temporarily releasing food stocks, reducing the costs of importing food, monitoring stocks or reducing the costs of improving the efficiency of supply chains.
Stocking essential commodities in sufficient quantities can prevent such short-term shocks to become more prolonged price shocks.
Meanwhile, improvements in storage, irrigation infrastructure and climate-resilient agriculture might enable India to become less reliant on good weather in the future.
India Food Inflation Outlook
The prospects of India food inflation will be influenced by monsoon patterns, agricultural output, international commodity prices and geopolitical issues.
Under better rainfall scenario and if domestic supplies stay comfortable, food price pressures could ease. But if the weather continues to be weak and the global energy and commodity prices remain high, food inflation could stay high.
For policymakers the challenge is more and more a mix of climate risk and geopolitical risk. For consumers, the question is whether the higher food prices are a short-term phenomenon or a permanent squeeze on household budgets.
Under monsoon conditions, El Nio risks, and uncertain global markets, food prices will probably continue to be an important economic indicator to watch over the coming months.
