Why food inflation has been high in India?

Rudrani Bhattacharya of NIPFP, Narhari Rao and Abhijit Sen Gupta of ADB look at this persistent case of food inflation being high in India (ppt here)

Well, the reasons are well-known and debated:

• Rising international prices
• Diversification of diet towards high value food products
• Rising input costs – wages and fuel
• Rise in Marginal Support Prices

Another reason which has not been mentioned much is the ignorance of agriculture sector. The complacency set in in 2000s as we started growing and thought we could ignore the basics. The agriculture sector became a really boring thing to study and did not really get one jobs too. Now, it is haunting us big time as we lag in productivity in a big way. There were hardly any debates and discussions till things started heating up around  2007 when global commodity prices started rising and food inflation began to rise. This was soon followed by the crisis which again took the attention away.

In other countries, food inflation has not been much of an issue and even overall inflation levels have been really low. The idea there is to stimulate demand and generate more inflation.

However, food and overall inflation  is a big issue in India. Ideally, if food prices increased then demand for other non-food items should have declined which should have seen prices easing. But this did not happen really. The prices of other non-food commodities increased too. What instead happened was food inflation led to higher demand for wages which increased costs and overall inflation. The producers of food got higher incomes leading to higher inflation. Got really complicated at the end.

In the backdrop of persisting high food inflation in India, we gauge the transmission of food inflation to core (non-food non-fuel) inflation and headline inflation. Food inflation may have positive impact on core inflation via rise in cost of labour inputs, substitution effects of higher relative food prices as well as the real income effect of producers in the food sector. Rise in food inflation will induce labourers to bargain for higher wages, if food constitutes a significant part of their consumption basket. This would raise the cost of production and hence prices of non-food items as well. Rise in food prices relative to aggregate prices would raise demand for non-food products via substitution effect and also via income effect of the producers in the food sector, as their real income increases with rise in relative price of food.  

An increase in food inflation causes aggregate CPI inflation to rise substantially as food constitutes a large share of the CPI basket. Apart from this direct effect, aggregate inflation increases indirectly due to rise in core inflation as a result of the transmission of food inflation into it. Specifically, we find 1% increase in food inflation results in core inflation rising by 0.61% immediately, which further increases to 0.72% in the next period, and is followed by a reduction to 0.55% that persists till 20 months after the shock (Figure 6). Similarly, an increase in food inflation raises aggregate inflation by 0.65% after two months of the shock and exerts a persistent upward pressure on the aggregate inflation. Thus in either case the impact turns out to be persistent and takes a long time to die out. 

With the shift to CPI, food inflation will remain a huge issue going ahead too.

We need more coverage and regular briefing on the agriculture issues. Just like central banks have these monetary policy meetings and decisions, we could have a similar thing for agriculture too, Less hyped though..

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