The RBI's war against inflation, particularly food inflation, seems to have imbibed Sun Tzu's classic military strategy of subduing the enemy without fighting.
That's because, food prices are beyond the control of any central bank, not just the RBI, and even if monetary authorities haul their entire policy arsenal out of storage, prices simply cannot be controlled like sugar in your coffee.
Yet, RBI rolled the dice more than two years ago and is still waiting to win. Even as it raised the repo rate by a staggering 250 bps (2.5%) between May, 2022 and February, 2023, food prices were in no mood to relent and everyday kitchen items like tomatoes, potatoes, onions, pulses, fruits and others unleashed horrors upon the hearts of households. The highest contributor to headline inflation was tomatoes, which shot up by 158.8% at one point, while onion prices rose by 86%.
Often, it's the economics of demand and supply that determines the price of fruits and vegetables and everything else, but as can be seen in the past two years, food prices were defining the direction of headline inflation itself.
So the country's designated inflation-wranglers, led by Governor Shaktikanta Das, decided not to further engage in a sword fight and held the key benchmark repo rate at 6.5% since February, 2023. While keeping an eye on the slow-burn food disinflationary process, the central bank dispatched eminent agricultural economist Ashok Gulati and a bunch of fellow economists to figure out a way, any way, to bring food inflation to heel and jam it below 4%.
Given food inflation's significant impact on overall headline inflation, Gulati and team were tasked to understand why and when food prices become cranky. This was also important as generating accurate inflation forecasts is critical for the very conduct of monetary policy. So they created their own bespoke inflation monitor, besides finding out that various supply and demand-side factors like monsoon, input costs, rural wages, demand for protein-rich items, MSP, supply-chain measures and government policies were wreaking havoc on food prices. In short, it's clearly both the government's job and remit to ensure that food prices remain range bound.
They identified four key commodity groups -- vegetables (tomatoes, onions and potatoes) pulses (chana, tur and moong dal), fruits (bananas, grapes and mangoes) and lastly, livestock (milk, poultry, meat and eggs). Besides several value chain inefficiencies, the study team was greeted with grim realities, where farmers were getting next to nothing for their harvest.
For instance, farmers' share in the consumer rupee is just about 33% for tomatoes, 36% for onions and 37% for potatoes. Likewise, they get just 31% for bananas, 35% for grapes and 43% for mangoes in the domestic value chain.
The returns are relatively better for pulses and livestock commodities. While 75% of the consumer rupee spent on chana dal goes back to farmers, the share is about 70% for moong dal and 65% for tur dal.
Similarly, farmers' share in the consumer rupee works out to 70% for milk, 75% for eggs, while for poultry meat, the share of farmers and aggregators taken together is 56%.
The team suggested urgent marketing reforms, besides other measures, to ensure better financial gains for farmers.
Unlike other countries, where the weight of food and beverages in the CPI basket are between 10% and 20%, they have an overwhelming presence in India's headline inflation with a weight of 45.86% (with food alone at 39.06%, prepared meals at 5.55% and non-alcoholic beverages at 1.26%). Given the high share and the susceptibility of food to supply shocks, it poses a major challenge for policymakers. Above all, food price volatility could lead to second-round effects and hence both the government and RBI keep a close watch on the price movements.
In all, the National Statistics Office tracks 299 commodities grouped into six broad categories to arrive at monthly inflation estimates. Prices are collected as per a weekly schedule form 1,114 markets in 310 towns and 1,181 villages covering all districts. Separately, the government also tracks daily prices of 38 essential food items from 550 centres across 34 states and union territories. The 38 commodities including rice, wheat, maida, besan, and others constitute about 31% of the total CPI weights. Monitoring wholesale and retail prices will help stabilize rates through timely policy interventions.
Within the food sub-group, tomatoes, onions and potatoes (TOP) account for 4.8% in the retail food and beverages group and 2.2% in the overall CPI. Though insignificant, their price fluctuations often topples retail inflation targets and squeezed household budgets. Interestingly, India is both one of the largest producers and consumers of TOP, but all three suffer from demand and supply chain bottlenecks, and climate adversities. So the economists tell the government to undertake marketing reforms, improve storage facilities and crop productivity.
As for pulses, which are an affordable dietary protein sources, they are one of the most volatile and price sensitive items within the food basket. During 2002-03 to 2022-23, there were four major episodes of high and volatile retail food price inflation in double digits of over 10%: 2008-09, 2009-10, 2012-13 and 2013-14. Still, the pre-covid period saw relatively moderate food inflation, barring occasional spikes on account of volatile vegetable prices. However, the post-covid period suffered periods of high food inflation, averaging 7.6% between March and October, 2022 and 8.2% during July-December, 2023 on account of supply disruptions caused by geopolitical tensions and adverse climate events.
Incidentally, India is the largest producer of pulses, accounting for a quarter of the global pulses production and it's also the largest consumer with a share of 27% of world pulses consumption. Even though we are the world's largest producers, production remains inadequate, leading to recurring shortages, which are met by imports.
The study suggested implementation of a prudent trade policy with applicable duties to stabilize prices. Besides, it urged the government to incentivize production, enhance marketing efficiencies, strengthen value chains and create a buffer stock of pulses to boost domestic supplies and contain inflation.
Coming to fruits, with a weight of 6.3% in CPI-Food and beverages group, the three items under the study include banana, grapes and mango. Together, the three fruits have 36% share in the CPI-fruits basket and contribute significantly to price volatility. Within this, banana has the largest share of 19.4%. In the export value chain, while the share is higher for mangoes, it's lower for grapes.
Even though fruits production has increased, price volatility remains a challenge due to seasonality and weather uncertainties. Another issue is the post-harvest losses and inefficiencies in the supply chain. The value chain of all the three fruits shows a fragmented and complex structure. Famers opt to sell their produce immediately due to limited storage facilities and advance credit availed, leading to lower price realisation. As the study report observed, the farmers' modest share in the consumer rupee highlights the prevalence of high transaction costs within the value chain. Addressing these could entail the expansion of cold storage facilities to reduce post-harvest losses.
Lastly, the three livestock commodities -- milk, poultry meat and eggs -- in the study group have a combined weight of 8.1% in the CPI basket. Milk prices saw an intermittently rising trend over the last few years, reflecting growing demand due to robust economic growth, rising per capita income and increased input cost pressures. Unlike agricultural crops, inflation in these commodities could be more persistent reflecting structural factors like shifts in consumption in line with income growth and transformation in the value chains.
The livestock sector is an important sub-sector of agriculture, which plays a significant role in generating gainful employment in the rural sector, particularly among the landless, small and marginal farmers, and women. Even though the value of output has grown significantly in animal protein-rich items, especially milk, poultry, meat and eggs, they saw price spikes during the post-Covid period. Given the high weightage of these items in the food basket as well as high volatility in their prices in recent years, these items contributed significantly to food and headline inflation in the post-pandemic period.
An analysis of seasonality in prices indicates that livestock and poultry items exhibit different seasonal behaviour. Milk prices peak in July and trough in March, while prices of poultry and meat trough during the winter months on improved supply and pick up during summer months with a peak in June. On the other hand, egg prices witness seasonal peaks during winter on higher demand and troughs during summer on lower demand. Egg prices also record some pick up during the monsoon season. Further, both poultry, meat and eggs exhibit festival-related seasonality with fall in prices during Shravan end of July and August and Navaratri (September-October) on lower demand in some parts.
Rising growth and per capita income in the last decade, coupled with sizeable increase in population has been shifting the food basket of Indian households and the shift in consumption pattern is best corroborated by the Bennett's law: as income rises, people eat relatively fewer calorie-dense starchy staple foods and relatively more nutrient-dense meats, oils, sweeteners, fruits and vegetables -- all the more reason for the government to ensure that production and supply is free of frequent price volatilities.
