India’s Food Inflation
Trends - ECONOMY
NEWS: India’s food inflation has become a cause for concern and
the centre of recent policy debates.
WHAT’S IN THE
NEWS?
Overview of Food Inflation
- Rising
Food Inflation:
Food inflation in India has become a growing concern and is the focal
point of many recent policy discussions.
- Cereal
Price Paradox:
While the country has seen record domestic cereal production in recent
years, cereal inflation has remained high. Inflation in cereals and
related products has fluctuated between 7-17% since July 2022. Despite a
moderation to 6.88% in November 2024 (year-on-year), prices continue to
rise on a monthly basis, with a 0.9% increase from the previous month.
Cereal Production
and Supply
- Record
Cereal Output:
India's domestic cereal production reached a record 288 million tonnes
(MT) in 2021-22, 303.6 MT in 2022-23, and 308 MT in 2023-24, according to
estimates from the Ministry of Agriculture.
- Significant
Weight in CPI:
Cereals and their products constitute 9.67% of the total weight in the
Consumer Price Index (CPI), making them a major factor in determining food
inflation. Additionally, they account for almost a quarter of the Consumer
Food Price Index (CFPI). This means any significant price fluctuation in
cereals has a direct impact on both food and general inflation in the
economy.
Role of Rice and
Wheat in Cereal Prices
- Dominance
of Rice and Wheat: Rice and wheat are the dominant contributors
to the cereal sub-group in the CPI. Rice holds a 4.75% weight and wheat
has a 2.73% weight in the cereal sub-group, making up about 77% of the
sub-group’s total weight (9.67%). When rice and wheat products are also
considered, their combined contribution increases to approximately 92% of
the sub-group's weight.
- High
Contribution to Production: Rice and wheat together account for around
81-82% of total cereal production on average over the last three years
(2021-22 to 2023-24), with rice leading in terms of output increase.
Procurement and
Stocks of Rice and Wheat
- Rice
Procurement:
The procurement of rice has steadily increased over the years, growing
from 38 MT in 2016-17 to 60 MT in 2020-21, before slightly decreasing to
57 MT in 2023. This trend reflects both the rise in production and the
growing demand for rice.
- Wheat
Procurement:
Similarly, wheat procurement rose from 38 MT in 2020-21 to a peak of 43 MT
in 2021-22. However, wheat procurement levels have been more stable
compared to rice.
- Rising
Rice Stocks:
Rice stocks with the central pool increased substantially, from about 16.5
MT in September 2016 to 32.3 MT in September 2024, reflecting higher
procurement and production.
- Export
Trends:
India’s rice exports surged dramatically from about 4 MT in 2019-20 to 13
MT in 2020-21, and further to over 17 MT in 2021-22 and 2022-23. However,
exports dipped to 11 MT in FY24 after the government imposed a ban on rice
exports in July 2023, in response to rising domestic prices.
Impact of
Procurement and Export on Prices
- Rice
Price Surge:
The combination of increased procurement and higher exports, in
conjunction with rising domestic production, led to tight rice supply in
the open market. This constrained supply situation caused rice prices to
steadily rise, beginning in August 2022. As a result, rice inflation
remained in double digits from September 2022 to August 2024.
- Wheat
Price Volatility:
Wheat output increased moderately from 98.5 MT in 2016-17 to 113.3 MT in
2023-24. Although wheat production slightly decreased in 2021-22,
procurement levels rose during the 2020-21 and 2021-22 periods. However,
wheat inflation saw a sharp rise in 2022, peaking at 25.3% in February
2023. Wheat inflation has since moderated, primarily due to the high base
effect from the previous year.
Paradox of Rising
Prices Despite Increased Output
- Procurement
vs. Output:
Despite record production in cereals, the sustained rise in prices,
particularly of rice, can be attributed to the policy of unlimited
procurement and the sharp increase in rice and wheat exports. These
factors have put a strain on domestic supplies, leading to persistent
price hikes.
- Crop
Diversification Issues: The focus on rice procurement has led to a
lack of crop diversification. Despite significant increases in the minimum
support prices (MSPs) for pulses, oilseeds, and nutri-cereals, the
preferential procurement of rice has deterred farmers from shifting to
these more environmentally sustainable crops.
Need for Policy
Reform
- Rationalizing
Price Support:
The current procurement system, where the government procures rice and
wheat in large quantities, needs to be rationalized. A more balanced
approach to procurement could help curb rising prices. Limiting
procurement to the levels necessary for maintaining buffer stocks and
public distribution systems could mitigate the supply constraints that
contribute to inflation.
- Promoting
Crop Diversification: A key policy shift is needed to encourage
diversification away from rice to more environmentally friendly and
nutritionally rich crops like pulses, oilseeds, and nutri-cereals. This
diversification would help reduce the over-reliance on rice and wheat,
promoting sustainability in agriculture.
- Improving
Post-Harvest Infrastructure: The development of efficient post-harvest
marketing linkages and infrastructure is essential to support crop
diversification. This would help farmers sell diverse crops more
effectively, thereby incentivizing the production of a wider variety of
cereals and other crops.