India is facing a surge in food prices due to various factors such as supply disruptions, weather shocks, global commodity trends, and domestic policy measures. The high food inflation has posed a challenge for the government and the central bank, as it affects the household budgets and the economic recovery.
Supply disruptions due to floods and pandemic
One of the main reasons for the spike in food prices is the supply disruptions caused by floods and the pandemic. Heavy rains and floods have damaged crops and disrupted transportation in several states, especially in Maharashtra, Karnataka, Kerala, and Bihar. According to the Ministry of Agriculture, the area sown under kharif crops was 6.6% lower as of August 13 compared to the same period last year.
The pandemic has also affected the supply chains of food items, as lockdowns, curfews, and restrictions have hampered the movement of goods and labour. The closure of hotels, restaurants, and catering services has also reduced the demand for some food items, creating imbalances in the market. For instance, the prices of poultry products have fallen due to lower demand, while the prices of eggs have risen due to higher feed costs.
Weather shocks and global commodity trends
Another factor that has contributed to the rise in food prices is the weather shocks and global commodity trends. The erratic monsoon rainfall has affected the sowing and harvesting of crops, especially pulses, oilseeds, and coarse cereals. The possibility of El Nino, a weather phenomenon that causes droughts in some regions and floods in others, has also raised concerns about the crop prospects.
On the global front, the prices of edible oils, sugar, dairy products, and cereals have increased due to lower production, higher demand, and trade restrictions in some countries. India imports about 70% of its edible oil requirement and 15% of its sugar requirement. The rising global prices have put pressure on the domestic prices of these commodities.
Domestic policy measures to curb inflation
The government and the central bank have taken several measures to curb inflation and ease the pressure on consumers. The government has banned the export of non-basmati rice, imposed stock limits on pulses and edible oils, reduced import duties on some food items, and released buffer stocks of grains and onions in the market. The government has also announced a scheme to provide free food grains to 800 million people till November.
The Reserve Bank of India (RBI) has maintained a status quo on interest rates since May 2020, but has adopted a hawkish stance in its recent monetary policy reviews. The RBI has raised its inflation projection for the current fiscal year from 5.1% to 5.4%, citing food inflation as a major risk factor. The RBI has also announced measures to drain excess liquidity from the banking system to contain inflationary expectations.
Outlook for food prices
According to some analysts, food prices may remain high till September or October, before easing in the later months due to improved supplies and favourable base effects. However, some uncertainties remain such as the progress of monsoon rainfall, the impact of Covid-19 variants, the global commodity prices, and the policy responses. Therefore, consumers may have to brace for further rise in food prices before they cool down.