Inflation data released last week confirmed the worst fears about the state of India’s economy. At a time when our economic recovery remains fragile, a sustained bout of inflation is likely to undermine growth efforts, but even more so for a population already suffering a sharp slowdown. With rising job losses and declining incomes and wages, inflation could threaten food security in the country.
Wholesale Price Index (WPI) based inflation has been in double digits for a year now. The index also reflects the rising inflationary trend in food articles. While oilseeds are already witnessing inflation of over 20% for over a year now, even cereals are witnessing inflation now, with wheat inflation exceeding 10% in the last five months. Inflation in maize and barley has been seen at 25% and has been very high for more than six months now. It is clear that this inflation seen in many food items including essential items is not temporary. It follows a pattern of continuous price rise. Some of this is evident, looking at trends in international markets at the highest level of the Food and Agriculture Organization (FAO) Food Price Index since the series began in 1990. With grain and edible oil prices predicted to rise further, it so happens that there is no immediate respite from rising inflation.
Fortunately, the higher wholesale food inflation to retail inflation based on the Consumer Price Index (CPI) is still somewhat muted. Retail inflation stood at around 7% last month, with the food component at 7.7%. Both have crossed their acceptable price limits, but rising food inflation is a major concern for most Indians. One of the reasons why retail food inflation is much lower than farm-gate inflation is the timely intervention of the government in the aftermath of the COVID pandemic. The Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), which has provided 5 kg of free food grains to eligible beneficiaries of India’s Public Distribution System (PDS), has not only helped distressed households, it has also helped keep consumer inflation low. especially food prices. To protect the poor and vulnerable, the scheme was expanded to cover pulses and edible oil beyond the main cereals, both of which have seen price hikes. PMGKAY will run till September.
However, the challenge of persistent inflation may still make things worse. Most of the relief in PMGKAY has come at a time when inflation was soft. The current round of rising prices is likely to intensify and strengthen, given how it is driven by a geopolitical crisis and rising oil prices. Part of the food-price rise is due to an increase in global demand for biofuels, which can be obtained from cereals such as maize as an alternative to petroleum products. In addition to the disruptions caused by the war in Ukraine, supply shocks due to adverse weather conditions in some grain-producing countries are also expected to increase demand. A third factor that could put upward pressure on food prices is rising input costs, particularly of energy and fertilizers, both linked to hydrocarbon costs. Today’s price rise is a global phenomenon, with many countries going through periods of high inflation. Victims include major developed countries such as the US, UK and parts of Europe, but also developing countries such as Brazil and Mexico.
What complicates India is the domestic supply position, which is likely to be disrupted by lower than expected production in the rabi season as a result of extreme weather events. There are already indications that the current rabi wheat crop is likely to be 10-15% lower than estimates.
With low state procurement due to depleting stocks in our central pool and over-buying by private traders and food processing companies, the country needs to maintain sufficient stocks to be able to control consumer prices through open market sales. the wanted. But stock will also be needed to expand the PDS system and keep it running for longer than planned. At the same time, we need to expand its core basket by reintroducing pulses and edible oil, even though its coverage has been increased wherever necessary.
Another concern would be the onset of a wage-price spiral, as was observed earlier in India during the period 2008–13, when farming costs rose and agricultural profits declined. The challenge of providing food security is going to become more difficult given the current price trends. It is also necessary to satisfy the aggregate demand in case of income shortage. The best way to prevent our economy from falling into recession would be to revive pan-India demand by saving the real purchasing power of the people at large.
Himanshu is Associate Professor at Jawaharlal Nehru University and Visiting Fellow at Center de Sciences Humanes, New Delhi