Monetary policy in India has been navigating diverging economic trends. While GDP growth continues to surprise on the upside, core inflation seems set on a downward trajectory. However, food inflation — typically considered idiosyncratic — has stayed stubbornly elevated, restricting the fall in the consumer price index (CPI) and restraining the Monetary Policy Committee of the Reserve Bank of India. Mint Road wants to rein in inflation at 4 per cent on a durable basis from 4.8 per cent now. But is this possible without falling food inflation?
Food commands nearly 40 per cent weight in the CPI basket. Hence, and as past trends also indicate, overall inflation cannot be tamed without bringing down food prices. In all the years that CPI has neared 4 per cent, food inflation has stayed below 4 per cent. Since 2000, the headline reading has gone below 4 per cent in just six years, with the most durable run seen during 2000-2006 when it averaged 3.9 per cent. Notably, food inflation averaged 2.5 per cent in those years.
Since then, there have been only two years of the headline number dipping below target — 2017-18 and 2018-19 – when it averaged 3.5 per cent. That was when food inflation was a mere 1 per cent. Food inflation surged after the pandemic to 6.4 per cent on average (between 2020-21 and 2023-24), higher than the 5.9 per cent overall CPI inflation.
In the 50 months since the first lockdown, inflation has remained above 4 per cent all through and food has been above 4 per cent in 39 months. Headline inflation has been above 6 per cent in 24 months (the upper limit of RBI’s tolerance band of 2-6 per cent) while food has been above 6 per cent in 28 months. Even as overall CPI slid to 5.4 per cent in 2023-24, food rose to 7.5 per cent. It climbed further to 8.7 per cent in the first two months of the current financial year.
Hence, the easing of inflation to 4 per cent on a durable basis may be on shaky grounds at present. RBI expects average inflation at 4.5 per cent in the current year, with the last quarter at 4.5 per cent. This assumes a normal monsoon and high base will lower food inflation. CPI has softened recently due to the slide in non-food inflation, including core inflation (inflation excluding food and fuel). At 3 per cent in May, core inflation was at a record low. This fall would suggest muted demand pressures on inflation, creating scope for rate cuts.
Time and again, evidence has suggested the pivotal role of food in controlling overall inflation. Since food has high weight and is purchased at a higher frequency, it is known to influence inflation expectations and can put pressure on wages.
Recent research (Are food prices the ‘true’ core of India’s inflation?, RBI Bulletin January 2024) shows that large and persistent food shocks spill over into non-food inflation. Additionally, high food inflation hits the poor more since it has a higher weight in their consumption basket. Our assessment shows that the bottom 20 per cent of the population in rural and urban areas currently face nearly 50 basis points higher inflation than the top 20 per cent.
When will food inflation loosen its grip? Historically, the monsoon used to be its key determinant. Yet, climate change has increased the uncertainty around rains, and is progressively adding other weather shocks for agriculture. The key hope for this year is an above-normal monsoon predicted by the India Meteorological Department. Even so, its distribution, as always, remains uncertain. Despite the monsoon arriving on schedule, its progress has been slow. As of June 30, the all-India rainfall deficiency was 11 per cent below the long period average. A pick-up in rains since then has plugged the deficit. But, to spur the rural economy and to tackle food inflation, we need adequate and well-distributed rains for the rest of the season.
To increase the risks further, other weather shocks such as heatwaves and unseasonal rains have added a fresh dimension to food production and its price outlook. With climate change, the frequency and scale of these shocks has been increasing, evident in the post-pandemic period. In 2022-23, heatwaves and unseasonal rains contributed to a surge in inflation, even as the monsoon turned out normal. In 2023-24, El Niño was aggravated by global warming, leading to the driest August India had seen in recorded history.
While the shocks have been varied in nature, they have kept overall food inflation stubbornly high. Heatwaves have affected crop production by depleting groundwater levels, shrivelling wheat grains and pest infestations. They also affected dairy and poultry output. On the other side, unseasonal rains hit crops during harvesting and transportation stages.
The time has come for policy to factor in the effects of climate change since the absence of mitigating measures could lead to a structural increase in the risks to food inflation. Controlling climate change’s impact on food will require help from fiscal policy. Agricultural infrastructure needs to be upgraded — from production to transportation and storage. For production, policy can help promote climate-resistant crop varieties. The introduction of heat-resistant wheat was a welcome step this year, which needs to be pursued for other crops as well. Agricultural research needs to be incentivised. Currently, investments in R&D are just around 0.5 per cent of agriculture GDP, according to a 2023 paper by ICRIER.
Irrigation infrastructure needs to be stepped up amid heatwave-linked risks to water availability. Despite government efforts, only 57 per cent of agriculture is covered by irrigation so far. Cold storage and food processing should be further encouraged. This will help reduce food wastage amid increasing risks to food supply. Until these structural issues are addressed, risks for food inflation are likely to stay elevated. Even though monetary policy has limited capacity to address these issues, it cannot ignore persistently high food prices if it wants to achieve its goal. The upcoming Union Budget needs to intensify efforts in this direction.
Joshi is chief economist, Tandon is senior economist, and Rajadhyaksha is economic analyst at CRISIL Ltd
