New Delhi -°C
Today in New Delhi, India

Sep 19, 2019-Thursday
-°C

Humidity
-

Wind
-

Select city

Metro cities - Delhi, Mumbai, Chennai, Kolkata

Other cities - Noida, Gurgaon, Bengaluru, Hyderabad, Bhopal , Chandigarh , Dehradun, Indore, Jaipur, Lucknow, Patna, Ranchi

Friday, Sep 20, 2019

What’s behind fall in food inflation?

Unless, India finds a way to stabilise vegetable prices — despite their low weight, vegetables have been the biggest contributor to change in food inflation — stabilising food inflation will remain a challenge.

india Updated: Feb 12, 2019 16:09 IST
Roshan Kishore and Vineet Sachdev
Roshan Kishore and Vineet Sachdev
Hindustan Times, New Delhi
A comparison of vegetable inflation trends and production for previous years shows that  when it comes to vegetables,  prices are far more volatile than production in India.
A comparison of vegetable inflation trends and production for previous years shows that when it comes to vegetables, prices are far more volatile than production in India.(HT Photo )
         

The reason for India’s declining food inflation (it is negative) may lie in vegetables.

The food and beverages sub-component of Consumer Price Index (CPI), India’s benchmark inflation index registered a decline of 1.1% in the quarter ending December 2018, only the second instance of a decline in quarterly food inflation since March 2012, the period for which CPI data is available. While the magnitude of fall in food inflation in the December 2018 quarter is the highest, it is in keeping with the trend since September 2017.

For those looking for a reason, it’s safe to blame it on the bhindi (okra).

The food and beverages component of CPI has eleven broad sub-components with varying weights. Cereals and products category has the biggest weight (21%) in the food group and is followed by milk and products (14%) and vegetables (13%).

See Chart 1: Weight of each sub-group in food basket under CPI

 

Despite having a share of just 13% in the overall food basket of CPI, vegetables were the biggest reason for the fall in food inflation in the quarter ending December 2018. In fact, only four (vegetables, fruits, pulses and sugar) out of the eleven sub-components of the CPI food basket registered a decline in prices between December 2017 and December 2018. The combined weight of these four sub-groups in the total food basket is 41%.

See Chart 2: Weighted break-up of change in food inflation by sub-components

 

In its monetary policy resolution issued on February 7, 2019, the Reserve Bank of India listed excess supply conditions as one of the causes of this decline. “Several food groups are experiencing excess supply conditions domestically as well as internationally. Hence, the short-term outlook for food inflation appears particularly benign, despite adverse base effects”, RBI said. To blame “excess supply conditions” for low inflation suggests that farmers should reduce production of food items in order to revive prices. This will also entail a reduction in agricultural growth rates in the country. Given such drastic implications, the excess supply leading to falling prices argument merits serious examination.

Is excess supply a reason for the sharp fall in vegetable prices? Since, production data comes with a lag, it is difficult to accept or deny this claim with certainty for the last quarter. However, a comparison of vegetable inflation trends and production for previous years shows that when it comes to vegetables, prices are far more volatile than production in India.

See Chart 3: Annual change in production and prices of vegetables

 

It can also be said that vegetable price movements have little to do with developments in foreign markets, as there is not much linkage between the two. In 2017-18, the latest period for which data is available, export and import of fresh vegetables had a share of 2.1% and 0.02% in the total value of India’s agricultural exports and imports.

To be sure, vegetables are not the only major contributor to volatility in India’s food inflation. The pulses and products category, despite having only 5% weight in the total food basket, has had a disproportionate influence on food inflation in the past. In fact, the relative contribution of these two food groups has been greater than all other food items in the CPI’s food basket in most periods in the past. Relative contribution of a food group to inflation is defined by its percentage contribution to change in food inflation divided by its percentage weight in the CPI-food basket.

See Chart 4: Relative contribution to food inflation

 

Given India’s large import dependence in pulses — pulse imports account for more than 10% of the country’s total agricultural imports — low global prices could have contributed to a softening of pulse prices in the country. However, this is not the main reason for the recent crash in food inflation.

Unless, India finds a way to stabilise vegetable prices — despite their low weight, vegetables have been the biggest contributor to change in food inflation — stabilising food inflation will remain a challenge. And excess supply alone does not explain most of the fluctuation in vegetable and hence food inflation in India.

First Published: Feb 12, 2019 16:09 IST